Economic studies
Azerbaijan

Azerbaijan

Population 9.5 million
GDP 3,956 US$
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Synthesis

major macro economic indicators

Main economic indicators 2015 2016 2017(f) 2018(f)
GDP growth (%) 0.6 -3.1 -0.1 2.3
Inflation (yearly average, %) 4.0 12.4 13.0 3.5
Budget balance (% GDP)* -4.8 -1.2 -1.5 1.5
Current account balance (% GDP) -0.3 -3.6 4.0 7.0
Public debt (% GDP) 28.3 40.0 52.0 47.0

 

* With transfers from the oil fund (SOFAZ) (f): forecast

STRENGTHS

  • Large sovereign wealth fund thanks to oil production
  • Significant gas potential in the Caspian Sea
  • Prospect of gas exports to Turkey, then Europe
  • Link in the connection between China and Europe
  • Development of rail corridors with Iran, Turkey and Georgia

WEAKNESSES

  • Strong dependence on hydrocarbons; limited non-oil sector
  • Decreased oil production (25% reduction over the last six years)
  • Weak banking system
  • Risk of aggravation of the armed conflict with Armenia
  • Governance problems (corruption, repression, offshore money laundering)

Risk assessment

Recovery based on rising oil prices

The recovery in oil prices and the increase in gas exports to Turkey are feeding Azerbaijan’s recovery. Household consumption (54% of GDP), down for three years, picked up again against a backdrop of rising incomes and falling inflation linked to the stabilisation of the manat. Public investment in infrastructure and public building could resume thanks to easing budgetary constraints, However, this mainly concerns projects linked to developing the Shah Deniz gas field in the Caspian Sea and the completion of the Trans-Anatolian Natural Gas Pipeline (TANAP) to the Greek/Turkish border, which, in the long term with the construction of the Trans-Adriatic gas pipeline (TAP), will transport Azeri gas to Western Europe. This in turn should lead to increased partnerships with foreign entities.

 

Private investment excluding hydrocarbons could come out of its sluggishness with the reduction of the key rate from 15% to 10% between January and June 2018, which could further fall given the firmness of the manat. Moreover, the decline in credit associated with the weakness of the banking system is set to soften. The contribution of foreign trade to growth could become slightly negative. Additional gas exports will only partially make up for the decrease in oil exports, but together will still remain the main export (85%). Imports are set to grow more quickly due to increased consumption and investment. Apart from the hydrocarbon sector (45% of GDP and 76% of industrial production), the rest of the economy should benefit from the desire to diversify into cotton and vehicles (in partnership with the Iran Khodro industrial group).

 

Public and external accounts in surplus again

In response to the decrease in budgetary revenues derived from hydrocarbons (75% of the total), Azerbaijan has had to resort to the sovereign wealth fund and reduce its spending, particularly in investment, in order to limit the deterioration of the government balance. Despite this restrictive policy, the state has been forced to increase its debt burden. Due to falling oil prices and the ensuing sharp depreciation of the manat, it has had to support public enterprises – notably including the country’s leading bank, the International Bank of Azerbaijan (IBA). The state has offloaded its non-performing assets (USD 5 billion) by entrusting them to a public entity created for this circumstance with its guarantee, before taking over its external debt (USD 2.45 billion after restructuring) on which it had defaulted. The IBA’s difficulties are not unique in the banking sector, which has seen the closure of numerous institutions, an increase in its non-performing assets, and a decline in its profitability These weaknesses are accompanied by a decline in credit: banks, with 80% of their deposits in US dollars, are only willing to lend in dollars in order to protect themselves against currency risk. Under such circumstances, borrowers prefer to resort to informal credit, even if the rates are usurious. Despite the soaring level of its debt, Azerbaijan’s position remains largely creditworthy thanks to the assets held by the State Oil Fund of the Republic of Azerbaijan (SOFAZ), valued at USD 38 billion as of June 2018 (80% of GDP). In addition, despite the burden of developing gas potential and pipelines to ensure the shift from oil, the debt (almost half of which is external) is likely to be reduced. However, the return to better fortune linked to the rebound in oil revenues is likely to delay the improvement in tax collection and a reduction in the non-oil deficit (27% of non-oil GDP)

 

Despite the deficit in services and revenues, a result of the presence of foreign companies in the hydrocarbon sector, the current account balance became positive again as a result of the return of the impressive trade surplus generated by hydrocarbon sales. The reserves having fallen to the equivalent of four months of imports, the SOFAZ provides the central bank with sufficient funds to service the external debt of the company in charge of the TANAP and the State Oil Company of the Republic of Azerbaijanc (SOCAR).

 

Well-established political power

President Ilham Aliyev was re-elected for a fourth term in April 2018 with 86% of the votes, in an early election marked by irregularities (according to international observers) and the boycott of the opposition, this time for seven years thanks to the 2016 referendum. Mr Alivey reappointed his wife, Mehriban Aliyeva, as Vice President. Parliament, dominated by the president’s New Azerbaijan Party (YAP), plays a secondary role vis-à-vis the executive. With the return of growth and despite deep inequalities, stability is expected to continue. Political opposition is weak, and the authorities do not hesitate to use repression.

 

Despite some progress, the country’s governance (World Bank ranking) is still not as good as in Georgia and Armenia, the other two Caucasian states, but is better than in most Central Asian countries. A decline in freedoms can be perceived, which renders relations with the EU more difficult. However, despite shortcomings in handling insolvency and cross-border trade, the country ranks 65th out of 190 on the ease of doing business index.

 

The risk of a surge in the armed confrontation with Armenia regarding Nagorno-Karabakh and other adjacent occupied Azerbaijani territories by Armenian forces is contained by the strong joint influence exerted on the region by Russia, Turkey, and Iran. However, the situation in Nakhchivan, an Azerbaijani enclave between Armenia and Iran that seemed calmer, has seen a resurgence of Azeri military activity coinciding with the political upheavals in Armenia.

 

Last update : July 2018

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