S&P Sees First Azeri Deficit in Decade as BBB- Rating Affirmed

Azerbaijan will run its first budget deficit in a decade this year as the government raises public spending before October elections, Standard & Poor’s said, affirming the country’s sovereign-credit rating and outlook.

Azerbaijan, rated at the lowest investment grade of BBB- with a stable outlook, will probably post a fiscal gap of 3.8 percent of economic output, S&P said today in a statement. While the Caspian Sea nation faces “some deterioration in the fiscal profile,” the ratings company said its public finances would retain a “large degree” of flexibility should oil prices fall.

“This has been driven by substantially increased government expenditures, particularly in capital investment, aimed at stimulating broader economic growth ahead of presidential elections in October 2013,” S&P said.

The third-largest oil producer in the former Soviet Union after Russia and Kazakhstan has enough mineral wealth to ensure ample budget income and economic growth even as fiscal surpluses narrow, according to S&P. President Ilham Aliyev, whose family has run the nation for more than four decades, was nominated by the ruling New Azerbaijan Party, or YAP, to run for a third term in office in the Oct. 9 election.

Azerbaijan saw its non-oil economy expand 11 percent in the first half of the year on increased output in construction and tourism, the State Statistics Committee said last month. Crude oil production fell to 21.8 million metric tons from 22.2 million tons a year earlier, it said.

“While oil production will likely plateau through 2017, increased gas production is expected to offset any declines in the immediate years thereafter,” S&P said.

Rating constraints for the country include its conflict with Armenia over the disputed South Caucasus region of Nagorno-Karabakh, which “retains potential for armed confrontation,” according to the statement.

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