Fitch credit agency revises investment climate in South Caucasus amid geopolitical tension Azerbaijan preserves positive investment-grade

The renowned American Fitch Ratings credit rating agency has warned that the economic stability of the South Caucasus triangle is being challenged by political and geopolitical developments that heighten external risks and policy weaknesses.

A recent report by the US firm, which issues scores to countries all around the world evaluating their investment climate and the probability of default, has highlighted the impact of these challenges on the sovereign credit profiles of Georgia, Armenia, and Azerbaijan, with the latter maintaining the region’s only investment-grade rating.

The report titled "Fitch on the Caucasus: Decoding Sovereign and Bank Credit Trends - Georgia, Armenia and Azerbaijan", published on February 25, records that Azerbaijan’s robust external balance sheet continues to support its credit rating, per Caliber.Az.

"Fitch expects fiscal policy will be consistent with maintaining robust sovereign external assets and avoiding the build-up of macroeconomic imbalances, preserving adequate policy buffers to manage oil price volatility," their prediction sounds. 

It does note, however, that Azerbaijan’s monetary policy framework remains weak relative to peers and constrained by underdeveloped capital markets, excess liquidity, low financial intermediation and still relatively high financial dollarisation. The report also notes that the performance of the Azerbaijani banking sector has been bolstered since 2019 by a reduction in dollarisation and an improvement in asset quality.

The financial institute's analysis found the political risk in Georgia to have "sharply" risen in the past months and was accompanied by a weakening of the country’s international reserves position, this has contributed to Fitch’s revision in December 2024 of the Outlook to Negative from Stable. Balance-of-payment flows, notably FDI, and the policy responses will be key to building reserves.

In Armenia, the costs of integrating about 65,000 ethnic Armenians who have resettled in the country after deciding to leave Azerbaijan following the end of the illegal occupation by Armenian armed separatists in the Karabakh region together with higher military expenditure will lead to an expansionary fiscal policy, pushing up debt levels.

"Notwithstanding these developments, the banking sectors in all three countries are profitable and healthy," the report states. 

In Georgia, political tensions have had no material impact on consumer confidence or banks’ profitability. The sector benefits from robust economic activity, still relatively high interest rates and improving asset quality. 

Fitch expects three years of record banking-sector performance in Armenia to continue.

By Nazrin Sadigova