Standard and Poor's on Friday cut the rating of oil-dependant Azerbaijan into into speculative or "junk" territory as plunging crude prices and a weak currency are expected to push it into recession.
"Azerbaijan depends heavily on the hydrocarbons sector" said the ratings agency as it cut the rating of the Caspian nation by one notch to BB+, out of the investment grade that is crucial for many funds to buy debt.
Standard and Poor's said "we now expect the Azerbaijani economy will contract in 2016 as exports decline while consumption falls in the wake of sizable manat devaluation."
Azerbaijan gave up trying to prop up its currency in December, which came under pressure as the latest plunge in oil prices began to pick up pace, with the manat plunging by around a third against the dollar.
Discontent over over price hikes and the collapse of the national currency sparked rare anti-government rallies in the ex-Soviet nation last month, with police using tear gas to disperse protesters.
Oil prices have tumbled from over $100 a barrel in June 2014 to under $30 last month, delivering a body-blow to the economies of oil-exporting nations around the world. A barrel of oil was trading for around $33 on Friday.
With oil exports accounting for around 40 percent of Azerbaijan's economic output and 95 percent of merchandise exports in 2013-2014, according to Standard and Poor's, the drop in crude prices will have a major impact on the economy.
"We now expect the economy will contract by 1 percent in 2016 as exports decline and consumption falls..." said the ratings agency.
It warned that "external risks are increasing, with the central bank’s foreign currency reserves declining by two-thirds from their mid-2014 peak."
While the devaluation of the manat should help Azerbaijan's central bank conserve its foreign currency reserves and boost the government's fiscal position, Standard and Poor's warned it will lead to a significant decline in income levels.
"In particular, we expect (gross domestic product) per capita to fall from nearly $8,000 in 2014 to about $4,100 in 2016 while inflation will spike at 15 percent this year compared to an average of 2 percent over 2012-2015," said the ratings agency.
The Financial Times reported this week that officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4 billion emergency loan package in what could be the first bailout due to plunging oil prices.