Estudos Económicos
Azerbaijan

Azerbaijan

Population 9.8 million
GDP 4,141 US$
B
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) -3.1 0.1 1.5 3.3
Inflation (yearly average, %) 12.4 13.0 3.5 3.5
Budget balance (% GDP)* -1.2 -1.5 3.7 1.2
Current account balance (% GDP) -3.6 4.0 6.6 8.1
Public debt (% GDP) 50.7 54.1 48.4 46.0

 

(e): Estimate. (f): Forecast. *Including transfers from SOFAZ.

STRENGTHS

  • Well-endowed sovereign wealth fund thanks to oil production
  • Significant gas potential in the Caspian Sea
  • Increased 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
  • Favourable business environment (25th in Doing Business 2019)

WEAKNESSES

  • Heavily dependent on hydrocarbons; limited non-oil sector
  • Declining oil production (25% reduction over the last six years)
  • Weak banking system
  • Risk that the armed conflict with Armenia could worsen
  • Governance problems (corruption, repression, offshore money laundering)

Risk assessment

Dependent on hydrocarbons, but diversification efforts are underway

Growth, driven by the performance of the hydrocarbon sector (44% of GDP and 76% of industrial production), should benefit from high oil prices and the development of gas production. In 2019, the country should also be rewarded for its diversification efforts with a more than 3% expansion in its non-oil and gas economy. The resulting increase in income should have a positive impact on households, whose consumption (52% of GDP) will continue to increase vigorously. Public investment (2/3 of the total) will be directed towards the energy sector (Shah Deniz gas field in the Caspian and completion of the Trans Anatolian TANAP pipeline) and economic diversification (cotton, tourism, fruit and vegetables, as well as automotive with Iran Khodro), as favourable economic conditions set the stage for significant public spending thanks to increased revenues. The revival of credit should also allow growth in private investment, which will remain mainly foreign (FDI). The contribution of trade to growth is expected to be slightly negative. Additional gas exports will only partially offset the decrease in oil exports due to well depletion, but together they will remain the main export item (90%). Imports will increase more rapidly, reflecting more positive trajectories for consumption and investment.

Current account and government surplus due to hydrocarbons

The transfers from the sovereign wealth fund (SOFAZ) will more than cover the initial deficit of 2.5% of GDP. Revenue growth since 2016, first through the development of the non-oil sector, then through the recovery in hydrocarbon prices (57% of budget revenues) and the expansion in gas production, is expected to slow (3% increase). Against this backdrop, a new fiscal rule has been adopted to reduce dependence on the oil cycle by controlling spending when prices are high. Specifically, the government has set the threshold above which additional revenue can be spent at USD 60, which is USD 5 more than in 2018. Even so, spending will continue to grow at a sustained rate in 2019 (15%). This is particularly true of investment spending, which will represent one third of total expenditure, with current expenditure increasing to a lesser extent (under 6%). After increasing because of assistance provided to state-owned companies struggling in the wake of major devaluations – in particular the International Bank of Azerbaijan (IBA) –, public debt is expected to be reduced, but remains vulnerable owing to its high sensitivity to external shocks (fall in oil prices, depreciation) and guarantees granted by the state. IBA's troubles are not unique in the banking sector, which continues to be affected by numerous bank closures, non-performing assets (25%), and low profitability. Despite all this, credit is expected to rebound slightly: banks – 80% of whose deposits are in US dollars – are only willing to lend in that currency in order to protect themselves against exchange rate risk. Accordingly, borrowers prefer to use informal credit, even if the rates are usurious. The policy of interest rate cuts (from 15% to 9.75%) initiated by the central bank in 2018 might continue, but will be tightened if there is pressure on the exchange rate, since currency stability is its main objective.

The current account should still be largely positive thanks to the structural trade surplus (20% of GDP) linked to hydrocarbons, despite the continued services deficit (8%) and income deficit (6.5%, but improving), which reflect the presence of foreign companies in the hydrocarbon sector. With the central bank's reserves dwindling to the equivalent of four months of imports over recent years, SOFAZ provides the central bank (the two had combined reserves of USD 45 billion at the end of 2018, an increase of 9% in one year) with sufficient funds to service the external debt of the company in charge of the TANAP pipeline and the state oil company (SOCAR). The country's total external debt, half of which is public, represents 45% of GDP.

A well-established regime

In April 2018, President Ilham Aliyev was re-elected for a fourth term, this time for seven years, taking 86% of the vote in an election marked by irregularities and an opposition boycott. He has reappointed his wife as Vice-President. The Parliament, dominated by the President's Party (YAP), plays a secondary role vis-à-vis the executive. With growth resuming and despite deep inequalities, stability is expected to persist. The political opposition is weak, and the authorities are not afraid to use repressive measures. Despite some progress, governance as measured by the World Bank ranking remains poor. Some freedoms are actually being curtailed, which is not facilitating relations with the EU. Conversely, the country’s business environment has improved dramatically, jumping 40 places in the Doing Business ranking. Finally, the risk of an escalation in the armed confrontation with Armenia over Nagorno-Karabakh and other adjacent Azeri territories occupied by Armenian forces is contained by the strong joint influence of Russia, Turkey and Iran over the region. However, Nakhchivan – an Azeri enclave trapped between Armenia and Iran, which had seemed calmer – has seen a resurgence of Azeri military activity coinciding with the political upheaval in Armenia.

 

Last update : Février 2019

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