Intesa Sanpaolo, signed by its own economist of the Studies and Research Department Giancarlo Frigoli, has published an interesting focus on the Azerbaijan. The publication illustrates, in particular, the developments of the country's economic system in the period 2014, trying to predict what 2015 will be like.
Il political context of Azerbaijan looks quite stable. The presidential republic is presided over by Ilham Aliyev (who succeeded his father), who obtained his third mandate during the 2010 elections with 73 seats out of the 125 in the National Assembly. The other seats went to independent figures and minor parties close to the President. The two main opposition parties, Musavat and the People's Front of Azerbaijan, won no seats.
As for the foreign policy, Azerbaijan maintains good relations with Russia and Western countries, without pursuing integration with either bloc. The only factor of political risk could derive from the organization of Nagorno-Karabakh, a region with an Armenian majority in Azeri territory which proclaimed itself independent in 1992. The situation in this region remains a source of tension which could lead to a new armed confrontation between Azerbaijan and Armenia, after what took place between 1992 and 1994.
Azerbaijan with a GDP of 77 billion dollars in 2014, it is the fifth largest economy in the group CSI (Commonwealth of Independent States). Like some of the other CIS countries, it is highly dependent on the mining activity of hydrocarbons. Gas and oil account for more than 40% of the entire GDP and about 90% of the value of exports. Approximately 80% of FDI (Foreign Direct Investments) from other countries are invested in the extraction activity. Last year, the regional tensions which affected, in particular, Russia and Ukraine they weighed, albeit in a limited way, on the Azerbaijani economy. In the first nine months of 2014, GDP growth slowed down, bringing the variation to 2,5% (year/year) compared to the 5,4% recorded in the same period of 2013. According to some preliminary indications filtered by the Presidency of the Republic, in 2014 GDP growth was 3%. This contrasts with an earlier October forecast from the IMF (International Monetary Fund), which assumed growth of 3,9%.
The aggregated data show a growth of consumption supported by real wage growth and low interest rates, and a slowdown in ininvestments the variation of which however remains in positive territory. This slowdown is in particular dictated by two factors: by the geopolitical tensions that have affected the area and by the deterioration of the prospects for the hydrocarbon market. Over the past five years, due to the expansion of spending, the large government surplus has been reduced to zero. In 2014 the consolidated budget recorded an overall deficit of 2,9% of GDP, compared to a surplus of 14,6% of GDP in 2010.
The already mentioned negative prospects for the market of hydrocarbons together with technical problems at the country's main well (Azari-Chirag-Guneshli), they influenced extractions. In the January-September 2014 period, hydrocarbon extraction activity recorded a drop of 2%, compared to an increase of 1% in 2013. Looking ahead, a further contraction in extraction activity is expected in the two-year period 2015-2016 of hydrocarbons. The negative economic situation that the sector is going through and well maintenance interventions by BP and the national oil company SOCAR will continue to weigh. Only starting from 2018 is the extraction activity seen to recover, thanks to the completion of the project for the exploitation of gas reserves called Shah Deniz-2, which also includes a new gas pipeline to Europe.
Almost all of the other sectors revolves around hydrocarbons. The manufacturing firms that can benefit most from good mineral holdings are those energy-intensive, as metalworking and petrochemical which in any case have a limited weight (4,5% of GDP). Other activities are those related to various services (transport, maintenance, exploration, etc.) and investments in infrastructure (road and air connections, oil and gas pipelines). The wealth deriving from the sale of hydrocarbons has also favored real estate development (le construction are the second largest industry in the country, accounting for 12,6% of GDP in 2013).
La balance of payments of Azerbaijan has a large current surplus determined entirely in the commercial part; services and income accounts, on the other hand, show substantial deficits. Looking at the monetary policy, during 2014 the slowdown of theinflation (the trend rate fell to 1,5% in September from 2,4% in December 2013) and the slowdown in the economy led the Central Bank to cut the reference rate several times, which fell to the current 3% , from 4,74% at the beginning of 2014. The positive real rates and the more uncertain economic prospects lead to believe probable new easing actions in the coming months. Since November 2010, the exchange ratio it is effectively stopped at 0,78 AZN : 1 USD. Even recently, the Monetary Authority has intervened to counter the appreciation of the currency.
Azerbaijan is ranked 80th out of 189 countries in the 2015 World Bank rankings on conditions for business, mainly due to particularly poor governance. Among the CIS countries, however, it presents the best competitive conditions based on the World Economic Forum index for 2014-2015. Beyond the relative comparison in the CIS area, the negative factors in the construction of this last index are: lack of infrastructures; poor educated job supply; and low degree of financial development.
Il rating of Azerbaijan's foreign currency sovereign debt is rated investment grade by major rating agencies (BBB- by S&P and Fitch; Baa3 by Moody's). This evaluation is supported by the substantial hydrocarbon reserves (in particular the gas fields, still far from being fully exploited), by the contained public and external debt and by the high coverage of external financial requirements and external debt.
The excessive dependence of the economy on hydrocarbons is the main factor of vulnerability. The IMF has estimated that a 20% drop in the price of oil removes, ceteris paribus, almost 1 percentage point. (percentage point) to growth in the first year. Azerbaijan, thanks to the financial resources set aside, has enough room for maneuver to activate policies to support demand aimed at offsetting the negative effects of the oil shock. The repercussions of geopolitical tensions in the CIS area on the Azerbaijani economy are instead contained, considering that this area has an incidence of just over 10% of the country's trade (6% of exports, 4% with only Russia, and 24% of imports in 2013). The main export markets are, in order, Italy (20%), the United Kingdom (10,5%) and Turkey (6,5%).
