Azerbaijan’s level of fiscal transparency is assessed more favourably than that of many regional economies, including several Gulf Cooperation Council states, S&P Global Ratings said in its latest report.

S&P noted that the State Oil Fund of Azerbaijan (SOFAZ) publishes audited annual reports with clear disclosures on asset composition, investment strategy and performance. Despite high transparency standards, S&P said Azerbaijan’s net general government asset position remains more moderate than the very large sovereign wealth buffers held by major GCC states.

S&P described Azerbaijan’s net fiscal asset position as one of its core credit strengths, supported by strong external balances. The rating agency expects consolidated general government net assets to remain above 50% of GDP through 2028, backed by continued accumulation in SOFAZ and low public debt. S&P’s net debt metric includes only SOFAZ’s highly liquid foreign assets, excluding lower-liquidity holdings estimated at around 10% of GDP in 2024.

S&P forecasts Azerbaijan’s GDP per capita to reach $7,800 in 2026, rising to $8,200 in 2027 and $8,600 in 2028. Nominal GDP is expected to total $80.7bn in 2026, $85.1bn in 2027 and $89.6bn in 2028, the agency reported.

Azerbaijan’s external balance remains one of its strongest credit fundamentals, supported by the large stock of foreign-currency assets accumulated by SOFAZ, S&P said. These buffers provide resilience against external shocks.

The agency expects Azerbaijan’s external liquid assets to exceed external debt at least through 2028, with the net international investment position stabilising around 76% of GDP over 2025–2028. Despite exposure to volatile terms of trade, the scale of Azerbaijan’s net external assets substantially mitigates the impact of unfavourable price cycles on liquidity and the wider economy.

The current account surplus is projected to average 3% of GDP over 2025–2028. A small deficit could emerge in 2028 as hydrocarbon production stabilises and import demand grows with investment needs.

S&P said the peace process between Azerbaijan and Armenia has “significantly improved,” with the August 2025 Washington Declaration reducing near-term conflict risks and planned 2026 defence budget cuts in both countries signalling confidence in the political course.

The agency characterised the current stage as the most constructive in decades but noted that a shift from high-level political declarations to a comprehensive, legally binding peace treaty has not yet been completed. The Washington Declaration established commitments on mutual recognition, accelerated border delimitation and the opening of regional transport links.

Execution after the declaration has moved slowly. The most politically sensitive barrier to a full treaty, S&P said, remains Azerbaijan’s expectation that Armenia amend its constitution to remove clauses implying territorial claims to Karabakh — a step facing internal opposition in Yerevan.

Earlier disputes over the Nakhchivan transport corridor have been politically resolved, with both sides agreeing that new routes will operate fully under the sovereignty of the host state. But technical issues like security protocols, customs procedures and sequencing of infrastructure upgrades remain open.

The risk of a large-scale conflict has “fallen substantially”, S&P wrote, but the absence of a formal treaty means the process remains vulnerable to domestic or regional shocks.

S&P expects Azerbaijan to maintain the AZN1.7 per USD managed exchange rate. The Central Bank’s regular FX interventions and strong reserve position support stability. FX reserves stood at $11.4bn as of October 31, 2025, equal to roughly four months of current external payments.

However, given the economy’s dependence on hydrocarbon revenues, S&P did not rule out a controlled adjustment in a prolonged low-oil-price environment.

The current regime stabilises inflation but limits monetary policy flexibility. Deposit dollarisation has fallen from 55% pre-pandemic to 29%, reflecting higher manat deposit rates and exchange-rate stability, though S&P cautioned that confidence-sensitive dollarisation could rise quickly if FX pressures emerge.

The agency highlighted ongoing reforms under the 2024–2026 Financial Sector Development Strategy, including phased Basel III adoption, pilot risk-based supervision and strengthened disclosure and macroprudential oversight. Once fully implemented, these reforms should bring banking regulation closer to international standards.

S&P added that Azerbaijan’s funding profile is supported by a growing deposit base. While deposit dollarisation is approaching regional averages, it remains significantly higher than loan dollarisation, creating a structural FX mismatch on bank balance sheets.

S&P affirmed Azerbaijan’s long- and short-term foreign- and local-currency sovereign ratings at BB+/B and revised the outlook from Stable to Positive before withdrawing the ratings at the government’s request.

The outlook revision reflected de-escalation with Armenia, progress toward a peace settlement and planned defence-spending reductions in 2026, all of which reduce conflict risk and could strengthen investor sentiment and medium-term growth if sustained.

S&P also highlighted Azerbaijan’s strong fiscal and external positions, including SOFAZ’s large assets, continued net general government asset surplus and low debt, which together provide “substantial shock-absorption capacity” and underpin macroeconomic stability.

The agency noted the significance of the August 8, 2025 joint declaration signed in Washington, which codified mutual recognition, renunciation of territorial claims, accelerated border delimitation and the reopening of regional transport routes. As an example of post-conflict economic normalisation, S&P pointed to the November transit of a Kazakh wheat shipment through Azerbaijan to Armenia — the first such passage in 30 years.

S&P said the outlook could have been revised back to Stable if fiscal metrics weakened or energy revenues fell sharply due to declining oil output. Conversely, maintaining strong fiscal and external surpluses and achieving durable progress in normalisation with Armenia would have supported an upgrade.