Public and external finances remain broadly comfortable, with fiscal and current account surpluses narrowing but still positive. The fiscal surplus is expected to moderate to around 2% of GDP in 2026, as oil revenues soften and social spending rises. The banking sector is stable, with credit growth supporting business activity, though profitability is pressured by higher funding costs. Insolvency data remains limited, but no major uptick is reported; however, weaker investment and tighter global financial conditions could elevate corporate default risks, especially among smaller firms, while an oil price level of around 60 USD/b could result in delayed payments to suppliers in the energy sector. External debt is low (below 10% of GDP) and sovereign risk is contained, but reliance on hydrocarbons for fiscal and export revenues remains a structural vulnerability.

Azerbaijan’s business environment is gradually improving, with reforms in SOE governance, beneficial ownership transparency and digitalization. However, regulatory quality, rule of law and corruption control still lag behind regional peers, deterring foreign investment and private sector growth. The state’s large economic footprint and shallow financial markets limit competition and innovation. Progress in renewable energy and infrastructure is notable, with several wind and solar projects reaching commissioning stage and upgrades to the transmission grid underway. Yet, environmental sustainability remains a challenge, with low scores in water management and recycling. Continued focus on green energy, regional connectivity and human capital development is essential for long-term competitiveness.

Political stability is anchored by President Aliyev’s administration, which retained a strong mandate in the 2024 elections for another seven-year term. However, the political landscape remains tightly controlled, with limited opposition participation and the institution of presidential special representatives in geopolitically-delicate areas, such as Karabakh and Eastern Zangezur. Regional risks persist, particularly regarding relations with Armenia and the unresolved status of the Zangezur corridor. While international mediation efforts continue, a comprehensive peace deal remains elusive. While formally allied and sharing Soviet history, Azerbaijan balances its relationship with Russia by fostering ties with the West. Relationship with the US has improved noticeably with Washington brokering initiatives potentially conducive to a broader peace agreement between Baku and Armenia. Azerbaijan is also deepening ties with the EU (energy cooperation), Türkiye (connectivity) and other regional players, but the broader South Caucasus remains exposed to geopolitical shocks. Domestic governance reforms are ongoing but face implementation challenges, and the risk of renewed tensions cannot be ruled out.