Fitch Ratings is cautiously optimistic about the creditworthiness of the South Caucasus states of Azerbaijan, Armenia and Georgia. But in a recent call with reporters to discuss the regional outlook, Fitch analysts acknowledged that geopolitics is a wildcard when it comes to predicting the region’s financial future.

According to Fitch, the three countries are not in danger of defaulting on their obligations, but neither are they seen as particularly safe investment opportunities. 

Azerbaijan enjoys the highest Fitch rating among the three South Caucasus states with a BB+/positive outlook, just one notch below investment grade. Fitch analyst Erich Arispe Morales applauded the government’s “fiscal prudence” as it strives to reduce its dependence on hydrocarbon export revenues. The country’s key task in the coming years is developing non-energy sectors of the economy, he said. 

Morales told reporters via Zoom that the need to generate comparatively high levels of revenue will remain strong as the Azerbaijani government proceeds with the reconstruction of Nagorno-Karabakh. Baku completed its reconquest of Karabakh in 2023. At present, a significant drop in energy prices could upend Baku’s efforts to maintain fiscal discipline.

Georgia and Armenia have been “unexpected beneficiaries” of the war in Ukraine, due to “large” inflows of capital and migrants, mainly from Russia, Fitch analyst Arvind Ramakrishnan said. Even so, the two countries continue to grapple with geopolitical uncertainty, due mainly to extensive trade ties that both countries have with Russia.

Fitch currently gives Georgia a BB/positive outlook rating. While Ramakrishnan offered general praise for the Georgian Dream government’s management of the economy, he noted that the country’s political climate is “quite divisive.” Pointing to parliamentary elections scheduled for this fall, he added that there is a wide expectation that the country will maintain fiscal continuity, given that the Georgian Dream coalition is widely expected to secure reelection.

In its latest ratings assessment, Fitch expressed concern about the International Monetary Fund’s decision in late 2023 to suspend a lending program due to concerns about a governmental move to reorganize the Georgian Central Bank’s operating structure. The changes appeared to pose a threat to the bank’s policy-making independence. 

“The fiscal impact of the suspension of the IMF program … remains limited, but questions over policy credibility remain unresolved,” the Fitch assessment reads.

Ramakrishnan also said geopolitics “does weigh on [Georgia’s] rating,” going on to acknowledge that there is “no getting away from the fact” that Georgia maintains “very strong” trade relations as it strives to gain European Union membership. As for Tbilisi’s EU membership bid, Ramakrishnan said there are a “lot of complications” and it will be a “slow process.”

Armenia enjoys a BB-/stable outlook from Fitch. Ramakrishnan said the sudden influx of roughly 100,000 ethnic Armenians from Karabakh will have a “short-term negative impact” on the government’s budget, requiring increased state outlays for refugee resettlement. But he predicted that “fiscal consolidation” over the medium- and long-term will not be undermined by the refugee crisis.

The big question mark hanging over Yerevan is the country’s relationship with Russia. In the wake of Azerbaijan’s retaking of Karabakh, Armenian officials have moved to distance themselves from Russia and build stronger relationships with the West. But any westward pivot will be complicated by Armenia’s trade dependency on Russia, Ramakrishnan indicated. He said the possibility of Armenia successfully decoupling trade ties from Russia was “unlikely.”   

Fitch Ratings, along with Moody’s and Standard & Poor’s, comprise the Big Three global credit rating agencies. A BB rating in Fitch’s system indicates that a sovereign government has the means to meet debt obligations, but nonetheless has “an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.”