General Outlook
Borrowing to build: the deficit debate - Azerbaijan’s economy continues to grow at a steady pace, supported by balanced spending, a reduction in the budget deficit, and improved credit ratings. Since 2022, external debt has been strategically reduced, while domestic debt has increased, leading to reduced currency risk and deeper financial markets
Financial Shield of Azerbaijan – As gold prices and global reserves continue to rise, Azerbaijan follows this trend by strengthening its own financial holdings. With SOFAZ and CBAR expanding their reserves, Azerbaijan’s financial resilience continues to strengthen, reducing reliance on external debt
Navigating Fiscal and Monetary Policies – Monetary and Fiscal environment has undergone changes in recent year, aligning with broader global trends. While monetary policy was tightened in past year, fiscal policy has played an active role in reducing the budget deficit and increasing use of government bonds
Baku Stock Exchange: Direct and Indirect Funding Platform – The rising loan-deposit spread, driven by tightening liquidity, raises the question - why is this happening? At the same time, the decreasing spread between corporate and government bonds has made the Baku Stock Exchange an attractive funding platform for banks and corporates, leading to nearly 50 new issuances totaling 620 million AZN
Debt market of Azerbaijan – Government bond yields rose in 2024 as Azerbaijan shifted toward internal borrowing, driving yields higher. Furthermore, growing bank liquidity demands led to a surge in REPO transactions, reflecting shifts in the debt market
Equity market of Azerbaijan – Azerbaijan’s equity market reached new heights with IPO and the launch of mobile trading platforms, making investment more accessible and signaling a bold step forward
Placement of the Year – Being the first takes courage, which is why the title «Placement of the Year» is awarded to ABB for its groundbreaking achievement as the first-ever IPO in Azerbaijan. This milestone created an opportunity for investors to diversify their local portfolios with high-dividend-paying stock
What spread between interest rates on time deposits and loans indicate?
The growing spread between loan and deposit interest rates in Azerbaijan reflects shifts in credit risks, regulatory changes, and rising loan demand. One key factor is the insured deposit rate, locked at 12% for the past eight years, acting as a cap on deposit costs for systemically important banks. This has kept deposit rates stable, even as market conditions evolved. Additionally, reserve requirements have been increased, obliging banks to hold more cash reserves. This has added costs for commercial banks, leading them to lower deposit rates further while keeping lending rates high to offset the additional burden. Beyond regulatory changes, the post-pandemic recovery has fueled surging credit demand, further driving up loan interest rates. With M2 growth accelerating and credit portfolios expanding, banks are seeing stronger demand for financing, reinforced by Azerbaijan’s GDP growth from AZN 123 005 million in 2023 to AZN 126 337 million in 2024. As banks compete to supply this growing demand, they raise loan rates, further widening the spread. The Corporate Bonds to Corporate Loans Ratio shows a shift in corporate debt structure. From 2018 to 2019, the ratio was low, reflecting limited reliance on bonds. However, the ratio peaked at 3.43 in 2021 due to reduced corporate loan volumes during the pandemic. Since 2023, despite an increase in corporate bond issuance, the trend of declining corporate loans has caused the ratio to rise. This shift indicates a growing reliance on bond issuance, which reflects improved access to capital markets and a potential reduction in financing costs for corporations.
Corporate Bonds & Yield Spreads
The spread between the weighted average rates of corporate borrowing in AZN and 3-year AZN government security yields narrowed from 1.3% in 3Q 2024 to just 0.7%, indicating improved conditions for companies to raise funds. A detailed analysis follows in the next graphs
Is 2024 the best year for low-cost corporate funding?
The widening spread between deposit and loan rates, discussed earlier, has also influenced Azerbaijan’s corporate bond market, where borrowing conditions are evolving in a different direction. While bank lending rates have risen, the spread between corporate borrowing rates and 3-year government bond yields has narrowed to just 0.7% in 2024, marking a significant transformation in the country’s financial landscape. This shrinking spread signals a more favorable borrowing environment for corporates, enabling them to access funding at lower costs. The trend underscores growing competitiveness in the bond market. With corporate bonds largely issued with a 3-year maturity, they are becoming an increasingly attractive alternative. The narrowing gap between corporate and government bonds not only reflects reduced risk premiums but also indicates a more developed and efficient financial market. As borrowing costs become more aligned, companies are finding new opportunities to finance growth and investment, positioning 2024 as a milestone in Azerbaijan’s evolving capital markets. This shift also reflects the deepening connection between government fiscal policies and private sector funding opportunities, paving the way for sustainable economic development and a more resilient financial system
Baku Stock Exchange -
Direct & Indirect Funding Platform
Does the risk premium reflect a maturing market?
The chart above compares two key short-term interest rate indices in Azerbaijan’s financial market: the 1D AZIR Index, which represents unsecured 1-day transactions facilitated by the Central Bank of Azerbaijan, and the 1D AINA Index, which reflects secured 1-day REPO transactions conducted on the Baku Stock Exchange. The gap between these two rates highlights the risk premium associated with unsecured transactions, as they typically carry higher rates than secured ones. Over the past year, the indexes has shown increasing trend, while the spread is decreasing. For instance, in December 2024, the spread was 0.4%, compared to 0.7% in December 2023, indicating the decline in risk despite the overall increase in both indexes.
Baku Stock Exchange -Capital Market Insights
A closer look at Azerbaijan’s evolving capital market
Azerbaijan’s capital market is undergoing remarkable changes. Government bond volumes have climbed from 1.18 billion AZN in 2019 to 5.88 billion AZN in 2024, showing the government’s push to rely more on domestic borrowing and strengthen local financial markets. At the same time, Central Bank notes dropped sharply, from 10.59 billion AZN to 1.99 billion AZN, marking a shift away from short-term tools as markets mature. In the corporate world, securities volumes have risen steadily, reaching 2.28 billion AZN, reflecting growing business confidence in tapping into the capital market. However, the real standout is the explosion in REPO transactions, jumping from just 1.12 billion AZN in 2019 to an incredible 60.92 billion AZN in 2024. This growth signals the Baku Stock Exchange’s increasing role as a marketplace for short-term funding and liquidity.
Debt Market of Azerbaijan
The outstanding volume of debt market performance grew from 7.68 AZN billion in 2022 to 13.50 AZN billion in 2024. Government bonds remained the backbone of the market, increasing from 5.40 AZN billion to 9.70 AZN billion, reflecting growing reliance on domestic borrowing
Is Azerbaijan’s debt market the new engine of financial growth?
Azerbaijan’s debt market has experienced consistent growth, becoming a cornerstone of the country’s financial ecosystem. Outstanding bond values have risen steadily from 7.68 billion AZN in 2022 to 13.50 billion AZN in 2024, representing an impressive 76% growth between 2022 and 2024 alone. This upward trend highlights the increasing role of bonds in funding both public and private initiatives. The sustained growth reflects the government’s strategic shift toward domestic borrowing, strengthening financial independence while reducing reliance on external debt. At the same time, corporate bonds and emerging green instruments have contributed to this expansion, signaling growing confidence in Azerbaijan’s capital markets. This trajectory not only supports fiscal resilience but also fosters a more diverse and dynamic financial market, aligning with global best practices. As the market continues to expand, it provides a solid platform for economic growth and investment opportunities across sectors. The chart below illustrates the steady increase in the number of publicly issued bond placements, growing from just 4 in 2018 to 50 in 2024, further emphasizing the expansion of Azerbaijan’s bond market.
Equity Market of Azerbaijan
How is Azerbaijan’s equity market working lately?
Azerbaijan’s equity market is gaining momentum, with market capitalization reaching 6.07 billion AZN in 2024, driven by stronger corporate participation, particularly in the finance, utilities, and agriculture sectors. While the listed market continues to grow, a significant portion of equity remains in non-listed companies, indicating untapped potential for future public offerings. There is a shift from a predominantly financial sector to increased representation of the real sector in recent years. Despite this progress, Azerbaijan’s Equity Market Cap-to-GDP ratio stands at 4.8%, significantly lower than peer countries such as Russia (28.1%) and Kazakhstan (20.5%). Recent regulatory initiatives and financial reforms are laying the groundwork for a more dynamic and accessible equity market, making it an attractive option for both investors and companies looking to raise capital. Equity trading volumes have also experienced strong growth, particularly in the primary market, where companies issue new shares. In 2024, equity trading volumes reached 70.7 million AZN, the highest level in recent years. While the secondary market remains smaller, it continues to develop, ensuring a more active and efficient trading environment. One of the biggest milestones in Azerbaijan’s equity market development has been the introduction of mobile trading, making stock market participation more accessible than ever. This digital shift is a game-changer, allowing investors to buy and sell shares seamlessly from their mobile devices, improving market liquidity and boosting retail participation.
