With ample natural resources in the hydrocarbon sector, Azerbaijan is highly dependent on mineral products – which account for about 45% of GDP, 70% of fiscal revenue and 93% of goods exports. This has made the economy very vulnerable to external shocks. The lasting drop in global oil prices since mid-2014 and marked currency depreciations in competitor countries with regard to foreign trade have been such shocks that have hit economic growth, budget revenues, the balance of payments, the manat (AZN, the local currency) and foreign exchange (FX) reserves.
Real GDP growth decelerated to +2.8% in 2014 and +1.1% in 2015, down from +5.8% in 2013 and an average annual +13% in 2004-13. The fiscal deficit surged to about -7% of GDP in 2015, after -0.4% in 2014 and ten years of large surpluses before that. And the current account surplus dwindled away in 2015 after nine years of double-digit surpluses (in % of GDP). FX reserves of the Central Bank of Azerbaijan (CBA) fell from a peak of USD16.7bn in May 2014 to USD5.6bn in January 2016, mainly due to CBA interventions to defend the exchange rate and capital flight. To fight this rapid fall in reserves, the CBA devalued the AZN in February 2015 and again in December when it also shifted from a pegged to a floating exchange rate regime, and introduced capital controls in January 2016.
Downturn will continue in 2016...
Going forward, Euler Hermes expects GDP to grow barely in 2016 (+0.5%). The fiscal deficit is forecast at -5% of GDP in 2016 while the current account is likely to post a small deficit of -1% of GDP. Both public debt and total external debt should rise to around 30% and 40% of GDP, respectively, but this is still moderate as compared to peers. Having lost about half of its value since end-2014, the AZN stood at about 1:1.60 against the USD at the time of writing and is expected to remain under pressure for as long as uncertainty remains on the length and severity of the oil price slump. This implies a rise in inflation to a forecast average 10% in 2016.
...but SOFAZ provides substantial buffer
Nevertheless, Azerbaijan remains well-placed to withstand the current downturn, thanks to large FX reserves held by the State Oil Fund of Azerbaijan (SOFAZ). These stood at USD33.6bn at end-2015, compared to total external debt of around USD12bn. Combined FX reserves of the CBA and SOFAZ cover more than 25 months of imports. Moreover, Azerbaijan’s authorities have sought technical assistance from the IMF which should help to strengthen their policy response.