Previous Quarterly Editions
Expropriation Risk: 53 53 55 56 Political Violence Risk: 40 43 39 37 Terrorism Risk: 43 43 42 42 Exchange Transfer and Trade Sanction Risk: 53 52 55 57 Sovereign Default Risk: 44 44 48 50
TREND ▲ OUTLOOK ▲
Azerbaijan has been hit twice over by COVID-19, once through the impact on the health system and again by the impact on global oil prices. To slow the spread of COVID-19, the government was forced to re-impose a lockdown in June 2020 that stretched into July 2020, under which Baku residents were required to obtain approval from the police by text message before leaving the house even for essential trips. In March 2020, the government rolled out a bailout package worth almost 600 million USD to mitigate the impact of the pandemic on employment and the business sector. At the same time, it set up the Coronavirus Response Fund to which government ministries and businesses were asked to donate. By early May 2020, the fund had collected almost 70 million USD, much of which was used to construct modular hospitals and medical facilities in Baku and other major cities. But the overall cost of the pandemic is mounting even as oil prices remain low. Despite much talk of diversification, oil and gas production still accounts for more than 70% of government revenues and around 90% of exports. Although global prices quickly recovered from the low point of 16 USD per barrel in April 2020 (reaching relative stability of around 40 USD per barrel by July 2020), Azerbaijan still needs the price for crude oil to be above 55 USD per barrel in order to balance its budget. Having prices at around 30 USD for several months has put a severe strain on the economy. Azerbaijan’s position is particularly difficult because the oil it produces, Azeri Light, is widely used in the hard-hit aviation sector for jet fuel and is hard to store. As a result, demand has fallen particularly sharply. Baku reduced its daily production by 23% to meet its OPEC+ quota for May-July 2020, with the quota rising slightly for the second half of the year. One impact of the pandemic will be to slow efforts to diversify the economy away from oil as tourism (the most promising alternative), has suffered almost a complete shutdown. With the cabinet reshuffle in October 2019 (which brought in more youthful ministers), the election of a younger parliament in a snap poll held in February 2020, and together with a pandemic-related purge of corrupt municipal authorities, have all been presented as steps to accelerate reform, but none are likely to produce a quick change. Rather, President Aliyev has taken the opportunity to remove unpopular old elites, boost his personal popularity, and strengthen the hold on power enjoyed by his party and his family. However, much of his family’s wealth comes from sectors that have been hard hit by the pandemic, including aviation, hospitality, and tourism.
It is unlikely that the current crisis will loosen the tight grip that a small group of government-connected companies has on the economy, as they are best placed to ride out the economic downturn. As the country’s financial system came under increasing strain- following the collapse of oil prices in April 2020- the central bank took four of the country’s top banks; Atabank, AGBank, NBCBank and Amrakh Bank into administration and reduced capital requirements for others. In a related effort to boost public trust in the banking system, Aliyev signed an order extending the term for which bank deposits were guaranteed by the government. Yet liquidity and financial sustainability are likely to remain major issues so long as oil prices remain low. The global situation has ended government hopes of pushing ahead with a privatisation programme this year, and the country’s opaque bureaucracy and tame judiciary remain an obstacle to significant investment.
TREND ▼ OUTLOOK ►
President Aliyev continues to use the tight quarantine rules that have now been re-imposed as a means to suppress his few remaining political opponents. At the beginning of the pandemic, he accused them of taking advantage of the fears about the virus in order to sow panic. Since then, the authorities have carried out a wave of arrests targeted at the National Council of Democratic Forces, a coalition of political parties, on charges of breaking the quarantine rules. The ban on protests in central Baku looks set to continue once the outbreak is over. Ilqar Mammadov, leader of the Republican Alternative, was released from prison in April 2020 after heavy pressure from the Council of Europe and the European Court of Human Rights. He had been held since 2013, when he was planning to run against Aliyev in a presidential election.
TREND ► OUTLOOK ▲
Hundreds of Azerbaijani labour migrants who lost their jobs in Russia due to the pandemic have been gathering at the border with Dagestan for weeks trying to return home. The border has been closed since mid-March 2020 on health grounds rather than as a result of terrorist concerns. Discontent with the pace of repatriation has produced clashes with the Russian police, with the most serious in June 2020 involving 400 protesters which resulted in more than 50 protesters injured and 93 arrested. The difficulty of keeping the population under quarantine in the hot summer months as the economic crisis increases poses a challenge that the government needs to weigh against the growing pressure on the country’s healthcare system from allowing the virus to spread. By mid-July 2020, official figures showed more than 27,000 cases of COVID-19.
The central bank appears to have abandoned its intended move to a floating exchange rate regime, as the manat remained firmly pegged at a rate of 1.70 to the dollar (USD) even as the oil prices collapsed in March and April 2020. Hard currency reserves from SOFAZ, the state oil fund, are being used to support the currency and meet the growing demand for US dollars. In the first quarter, SOFAZ spent 2.8 billion USD to support the manet. There is a growing assumption that there will be a devaluation soon of around 30%, as happened in 2015, despite the government’s reluctance to take this course. Inflation looks likely to reach 3.5% this year.
Estimates from the Asian Development Bank in April 2020 suggested a contraction of less than 1% this year, but a contraction of 3-5% is now more likely. The budget deficit was already expected to widen to 3.3% of GDP in 2020 but the simultaneous fall in oil prices and surge in social spending means that it will be substantially bigger. Similarly, the cost of restructuring IBA, the country’s biggest bank, was expected to push the debt-to-GDP close to the legal limit of 30% this year, but it now looks likely to go over that figure. While Azerbaijan remains capable of borrowing externally, its international financing is increasingly concentrated in institutions that are not Western-led, and this trend may well continue.
Return to contents Next Chapter