Ongoing reforms in Azerbaijan could further reduce dependence on hydrocarbon sector – Moody’s

BAKU, Azerbaijan, January 17. The ongoing
reforms in Azerbaijan could further reduce economic and fiscal
dependence on the hydrocarbon sector beyond the expectations,
Trend reports
citing Moody’s.

“Moreover, there are prospects for further enhancements in
institutional strength and governance amid ongoing reforms to
enhance monetary policy transmission, financial sector regulations,
public finance management and transparency in public administrative
processes,” reads the latest report by Moody’s.

The rating agency notes that upward pressure on the rating could
develop if ongoing and further reforms lead to more rapid
improvements in governance, transparency, and policy predictability
that further strengthen the credibility and effectiveness of
institutions and their ability to adjust to long-term
challenges.

“Increasing evidence that diversification efforts will reduce
the exposure of the economy and government finances to oil price
cycles and long-term carbon transition would additionally put
upward pressure on the rating. Material improvements in economic
and diplomatic ties with Armenia that reduces risk of a
reescalation in geopolitical tensions will also be credit
positive,” the report reads.

Moody’s analysts also anticipate continued accumulation of SOFAZ
assets as the government advances non-oil revenue mobilisation and
non-oil fiscal consolidation efforts to reduce reliance on
hydrocarbon windfalls.

“Meanwhile, Azerbaijan and Armenia agreed to a peace framework
in August 2025 that has increased diplomatic engagement and lifted
border restrictions, suggesting a potential easing of geopolitical
risks relative to past decades of sporadic military conflict
between the two countries. Azerbaijan's "ba1" economic strength
reflects solid medium-term growth prospects against its significant
exposure to the oil and gas sector.

The government's "aaa" fiscal strength is underpinned by the
country's strong net creditor position, as the size of sovereign
wealth assets covers all of the government's direct debt and
guarantees, notwithstanding the high share of foreign currency
debt. Azerbaijan's "ba" susceptibility to event risks is driven by
strained but improving geopolitical relations with Armenia,” the
report reads.