After having left its currency freely floating in December 2015, Azerbaijan imposed capital controls – in the form of a 20% tax on currency outflows related to direct investment, the purchase of real estate or securities abroad – to stem exchange rate depreciation on 20 January 2016. Moreover, the international press reports that the IMF is currently in Azerbaijan to discuss a possible financial aid package.

Impact on country risk

The imposition of (soft) capital controls and news regarding a possible IMF support highlight that the sharp drop in oil price has hit the economy hard. As mentioned in January’s Risk Monthly, the sharp depreciation of the manat is a source of concern not only because it fuels social unrest but also because it threatens the stability of the banking sector, which is heavily dollarised. Public finances are also affected by the sharp decline in oil prices given their high reliance on oil revenues. Following the further drop in oil prices in January, the imposition of capital controls and the impossibility of ruling out further restrictions to stem currency depreciation given that social unrest is mounting, Credendo Group has decided to downgrade the short-term political risk from category 3 to category 4. The medium- to long-term political risk is also highly likely to be downgraded. In this regard, it should be noted that Azerbaijan was still considered a net external creditor in the last IMF World Economic Outlook (October 2015), which mitigated the MLT political risk somewhat. The commercial risk remains very elevated as the cost of reimbursing the debt denominated in foreign currency increased sharply following the sharp depreciation and as a credit crunch is expected.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com