Economy

Rainy Day Come & Go

Economy

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Rainy Day Come & Go

The government maintains its budget can handle lower oil prices amid falling domestic production, while the non-oil sector continues to pick up the slack.

Against a backdrop of plunging oil prices, Azerbaijan posted growth of 3% in 2014, partially thanks to the 7% expansion of the non-oil sector, according to Azstat. Adding to potential budgetary woes linked to the state of crude, domestic oil production continued its downward trend, dropping by 3.7% over the course of 2014 to 307 million barrels, mainly as a result of a drop in production at fields operated by BP. That said, officials have rejected claims that low oil prices will cause short-term problems, asserting that currency reserves are a sufficient buffer against declining revenues. But indeed, the timing of the dramatic fall in international oil prices could have been better for Azerbaijan, with one-third of the country’s 2015 budget, which was calculated based on a price per barrel of $90, according to EurasiaNet, earmarked for state investment projects, including infrastructure works in preparation for the June 2015 European Olympic Games. While it is likely that we can expect no extravagant new investment announcements, no changes to the spending plan have so far been announced, despite the cost of oil per barrel falling below $60, a figure that President Aliyev had indicated as a threshold, according to EurasiaNet. The government announced a 2015 growth target of 4.4% in late 2014, yet commentators suggest this could be at risk as the price of oil dropped below $50 in January. That said, the government anticipates the continued growth of the non-oil sector, predicting that its share in GDP will exceed 65% this year, up 5.5% over forecasts for 2014.

NOT ALL OIL

In 2014, the non-oil sector represented approximately 60% of GDP, with the Ministry of Finance projecting that this figure will grow to over 65% by end-2015. Oil still represents a significant chunk of government revenues, at some 65%, according to the Center for Economic and Social Development (CESD). But while Azerbaijan’s non-oil sector continues to grow—it expanded by 7% over 2014—oil output continued the decline it began in 2010, dropping 3.7% in 2014 when compared to 2013. The IMF forecasts GDP growth of 3.5% in 2015, a touch below a call of 4.4% the government made in November of last year. Azerbaijan’s proximity to Russia has also been highlighted as a concern, with ruble devaluation casting a wide shadow. That said, Azerbaijan is better sheltered than some of its fellow former Soviet states, such as Belarus, as it does not rely on the Russian market for trade. Indeed, it is likely that Azerbaijan will embrace the age-old maxim that every challenge is an opportunity, jumping at the chance to speed up a process of diversification that it has long known is key to its sustainability as an economy. One particularly recent and eye-catching development was the announcement by the International Bank of Azerbaijan that it is to issue a $200-$300 million debut sukuk this year, as the predominantly Muslim country looks to make inroads into the Islamic finance sector. The giant Shah Deniz 2 gas field project also continues, and when finished will begin pumping gas via a pipeline being constructed through Turkey and onto the European market. The expansion of gas infrastructure should work toward shielding Azerbaijan from future fluctuations in oil prices. Elsewhere, inflation came in at 1.4% in 2014, down from 1.5% in 2013. The government predicts a figure of 2.3% in 2015. Unemployment stood at 5% at end-2014, according to government sources.

MONEY IN THE KITTY

The 2015 budget was calculated on an anticipated oil price of $90 per barrel, with approximately 53.5% of the $24.7 billion kitty sourced from the State Oil Fund of the Republic of Azerbaijan (SOFAZ). This reality has led commentators to suggest that the budget could buckle, yet there has only been a hint that spending on the May 2015 European Olympic Games, which represents 20% of the cash earmarked for investment projects in the 2015 budget, could be scaled back should prices not increase. Indeed, the construction sector remains a significant job creator in the Caspian nation, with the government understandably unwilling to cancel projects. And thus, it seems likely that the country’s currency reserves, standing at $50 billion according to Azstat, will be deployed in order to maintain a state of business as usual until oil prices stabilize. According to comments made by a SOFAZ spokesperson in late 2014, the financing of strategic projects could cause a deficit at the state oil fund in 2015. And while no figure has been announced, the consensus across the government is that SOFAZ assets will only need to be deployed in the short run to cover a temporary gap between revenues and expenditures. The Central Bank also has a cash reserve, with only a tiny dip from $15 billion to $14.99 billion recorded from May to November 2014.

TRADE & INVESTMENT

Azerbaijan enjoys 47 bilateral investment treaties and 44 double taxation treaties, and is no stranger to FDI. According to the Azerbaijan Investment Corporation (AIC), $172 billion has been invested in the country over the past 10 years, of which $84 billion was FDI. And while the hydrocarbons sector has been the major draw, FDI stock in the non-oil sector has exceeded $35 billion. In the first three quarters of 2014, FDI reached $5.8 billion, with 85% of the figure invested into the oil and gas sector. Net financial assets for the January-September period totaled $7.9 billion and were composed of direct investments made abroad ($1.2 billion), portfolio investments ($156 million), and other investments ($6.5 billion). The Central Bank also added that in the first three quarters of 2014, the current account surplus totaled $9.1 billion, down 7.5% on the same period in 2013. In the oil and gas sector, the surplus came in higher at $15.1 billion. In overall balance of payments terms, Azerbaijan posted a surplus of $5.39 billion over the three months, up 1.64 fold on the same period in 2013. And while the non-oil sector is lauded for its continued growth, in trade terms it still posts a deficit. In 1H2014 overall, total foreign trade turnover volume hit $29.7 billion, with the balance in at $16.2 billion. According to Azernews, Azerbaijan trades with 143 countries, with 7.6% of its trade turnover accounted for by CIS countries. The country’s largest trade partners include Italy, Turkey, the UK, Germany, the US, Indonesia, Russia, Israel, France, and Japan, with the group representing almost 70% of total trade operations.

The price of oil will continue to have an impact on the development of the Azerbaijani economy as we move deeper into 2015. In GDP terms, however, the non-oil sector will prop up the growth outlook until oil production reverses its decline. The prospect of exporting gas from the Shah Deniz II field via a planned pipeline through neighboring Turkey and on to Europe will also go far toward suppressing concerns that more permanent low oil prices could affect the country’s long-term growth forecast and spending plan. Having saved prudently, though, it is unlikely that decreased revenues will be felt across the economy in the short term. Azerbaijan’s process of diversification is likely only to be expedited amid a more pressing environment.

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