Issue 4, 2015. August-September

   

AZERBAIJAN ECONOMY WEATHERS FALLING OIL PRICES, WEAKENED CURRENCY

Azerbaijan is one of Georgia's biggest export markets and a major source of FDI. In February the government allowed the manat to lose nearly 34 percent of its value.Investor.ge spoke with the Economist Intelligence Unit's Alex Nice about the state of the economy six months later.

Consumer spending and public spending on the first European Games in Baku buoyed the Azerbaijani economy, which grew slightly over five percent in the first quarter of the year despite the manat devaluation, according to a report published by Galt & Taggart's research team.

But the drop in international oil prices, as well as the manat devaluation, will impact the Azerbaijan economy, noted Alex Nice, an economist with the Economist Intelligence Unit.

"The devaluation of the manat, like the fall of currencies over the region, will push up inflation," he said, noting that this will cut into the country's growth rate.

In its Regional Economic Outlook Update for the Caucasus and Central Asia report, the IMF predicted just 0.6 percent growth for the Azerbaijani economy in 2015, compared to 2.8 percent in 2014.

The Galt & Taggart report forecasted that the growth in the first quarter was "mainly the result of one-off factors."

The report noted, however, that "these factors will probably subside" in later this year.

A weaker Azerbaijani economy could impat Georgia: Azerbaijan is a major market for Georgian exports: in 2014, Georgia exported $544 million worth of goods to the country, mostly cars, iron re-bar, live cattle, medicine, construction materials and beverages.

Azerbaijan is also a large investor in Georgia, with FDI reaching $302 million in 2014, as well as significan publish investment like the Baku-Tbilisi-Ceyhan (BTC) pipeline and the Baku-Tbilisi-Kars railway.

Falling oil revenue

The low international oil prices are also influencing the Azerbaijani economy.

Galt & Taggart reported in December 2014 that oil production in Azerbaijan has decreased from 50.8 million tons in 2010 to 43.5 million tons.

From 2011 to 2013, high oil prices made up the difference. The new, lower international oil price has cut into the country's revenues, however. The government forecast oil at $90 to the barrel for the 2015 budget, the report noted.

"Fiscal breakeven prices have risen in CCA [Caucasus and Central Asia] oil exporters in recent years, and countries such as Azerbaijan and Kazakhstan cannot cover government spending at oil prices below $58, as is currently projected for 2015," the IMF stated in the regional economic outlook report.

Nice agreed that the lower oil prices will likely cause the government to cut public spending.

"The fall in oil prices in the second half of the year is currently going to hit public revenues hard. Oil revenue is about 65% of government revenue. As a result, the fiscal deficit will widen this year," he said.

Nice said that there is an expectation that the Shah Deniz II project will increase gas exports once it goes online, which is expected to occur in late 2018.

But the increase in gas exports will not make up for the country's falling oil sales, he said.

Diversifying economy

Nice noted, however, that the Azerbaijan "government is aware that it needs to diversify." In a report published in March 2014, Galt & Taggart's research team noted that diversification is "high on the agenda" for the government. "Non-oil sectors have been experiencing a boom in recent years, growing 9% on average annually from 2010 to 2012," the report said. Non-oil exports doubled from 2006 to 2012, and grew an additional 13 percent in 2013, according to the report.

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