“That said, just like last year, the government may decide to keep a tighter rein on spending in order to shore up its fiscal position. Under our baseline forecast, we expect government debt to rise only marginally further, to 41.6% of GDP in 2017 (the debt-to-GDP ratio has already nearly quadrupled from 11.2% in 2014), after which debt is expected to decline slightly to 40.0% of GDP in 2018 when fiscal surpluses resume”, the agency said.
“Against the weaker budget and debt situations compared with a few years ago, the government retains sizeable fiscal buffers, specifically SOFAZ’s significant foreign currency assets. Even after declining by 1.3% year-on-year to $33.1 billion in 2016 (and after falling by 9.5% in 2015), SOFAZ’s foreign currency assets remain very large at more than three times the level of the government's outstanding debt. Official foreign exchange reserves at the Central Bank of Azerbaijan (CBA) increased in March to $4.4 billion, the highest level in fifteen months. Still, reserves remain considerably lower than historical averages. Indeed current levels are a mere 52% and 30% of average reserve levels in 2015 and 2014, respectively. That said, in January, the government announced that up to 7.5 billion manat (around $4 billion) would be transferred to the CBA from SOFAZ in 2017 to shore up official foreign exchange reserves. Inflation reached 14.5% in March 2017, only slightly below the November 2016 peak of 17.2%. The weakness of the manat in late 2015 and throughout 2016 contributed to inflation; however, the currency's recent appreciation has not relieved pressures, particularly as food price inflation has accelerated. Absent a major weakening of the manat, we expect that inflation will fall to the high single digits by the end of 2017 as the pass-through of the exchange rate to domestic prices diminishes. Inflation would remain higher for longer if a prolonged period of elevated inflation affects inflation expectations”, the agency added.