International rating agency Fitch Ratings declares, that the credit profiles of the South Caucasus are sensitive to political and external liquidity risks. The organization has published a report reviewing sovereign and banking credit trends in Georgia, Armenia and Azerbaijan.
Political or geopolitical developments that accentuate external vulnerabilities and policy weaknesses in the southern Caucasus region are highly pertinent to the sovereign credit profiles of Georgia (BB/Negative), Armenia (BB-/Stable) and Azerbaijan (BBB-/Stable), Fitch Ratings says.
A sharp rise in political risks in Georgia, accompanied by a weakening of the country’s international reserves position, 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 refugees from Nagorno-Karabakh and higher military expenditure will lead to an expansionary fiscal policy, pushing up debt levels. As with Georgia, a weakening of the currency would pose risks to debt dynamics, given high FX-denominated public debt.
Azerbaijan’s robust external balance sheet continues to support its credit rating. 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.
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.
Notwithstanding these developments, the banking sectors in all three countries are profitable and healthy. 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. In Armenia, Fitch expects three years of record banking-sector performance to continue. The performance of the Azerbaijani banking sector has been bolstered since 2019 by a reduction in dollarisation and an improvement in asset quality.
