Azerbaijan's foreign assets provide cushion against low oil prices: Moody's

The rating agency notes that the oil price drop has already delivered a significant shock to the oil-reliant Azeri economy and pressured the sovereign's balance sheet. However, Azerbaijan's large stock of foreign assets -- worth roughly $42 billion as of the end of the Q2 2015 -- give it time to adjust to lower oil prices, according to the report.

"Azerbaijan's sizeable foreign assets enable the government to let fiscal deficits widen during periods of lower oil prices, weaker growth and reduced fiscal revenues," said Sebastian Becker, a Moody's Assistant Vice President - Analyst.

Furthermore, over the past decade, Azerbaijan's public balance sheet benefited from surging hydrocarbon-related government revenue that resulted from higher domestic oil output. The windfall revenues from oil enabled the government to keep gross debt low and to accumulate large foreign reserves with the Central Bank of Azerbaijan and the State Oil Fund of the Republic of Azerbaijan.

"However, Azerbaijan remains strongly reliant on the hydrocarbon (oil and gas) sector, and thus remains vulnerable to a potential further decline in oil prices," added Becker. "The sovereign will continue to rely on hydrocarbon revenues to develop its non-oil GDP sectors."

Moody's notes that the Iran nuclear deal, under which the Islamic Republic of Iran (unrated) must curb its nuclear program in exchange for a lifting of economic and financial sanctions, could partially offset pressures from low oil prices for Azerbaijan. Although a rise in global oil supply due to Iran's imminent return to global oil markets would put downward pressure on oil prices in 2016, a credit negative, a lifting of the economic and financial sanctions on Iran would ultimately enable Azerbaijan to benefit from increased foreign trade and investment with neighboring Iran.