Index Trend Previous Quarterly Editions
Expropriation Risk: 53 Political Violence Risk: 43 Terrorism Risk: 43 Exchange Transfer and Trade Sanction Risk: 52 Sovereign Default Risk: 44
Risk Temperature 48 (Medium) -0
TREND ► ▲
Despite renewed calls from President Ilham Aliyev for greater efforts to diversify the economy, the hydrocarbon sector remains the country’s main economic driver. Oil and gas production still account for more than 70% of government revenues and around 90% of exports. Moreover, those figures are likely to increase rather than decrease in the medium term as the country’s gas exports grow in volume and value. In October, Aliyev accused some cabinet ministers of actively obstructing reforms meant to broaden the economy as they try to protect their bureaucratic turf. In a cabinet reshuffle that was more extensive than usual, the president replaced Prime Minister Novruz Mammadov, in office for just 18 months, with Aliyev’s own economic advisor while the long-serving head of the presidential administration, Ramiz Mekhtiyev, was replaced by a development specialist half his age who holds a US graduate degree. Other changes also saw a new wave of younger men moving into senior positions of power. Aliyev made a similar move in 2018, in both cases making statements equating relative youth with support for reform. However, even those now in their mid-40s, and considered young in this context, will have been educated in the Soviet era and have reached their positions through demonstrations of loyalty to previous Aliyev policies. As a result, there will be no quick change in the direction or implementation of major policies. The government will continue to invest heavily in tourism and transportation, both areas in which the president’s family have substantial interests, as well as in agriculture and construction. Despite this investment, the non-oil sector contributed less than 5% in 2019 and is unlikely to do much better in 2020. President Aliyev’s recent criticism of his government for not doing enough to support growth in the non-oil sector may produce some action in this area during 2020. There is also likely to be more emphasis on the petrochemical sector, which the government hopes will yield higher margins from oil by turning local crude production into plastics for export. Looking abroad, strengthening economic relations with neighbouring states while deepening Armenia’s isolation remains a key priority. The very marginal improvement in formal dialogue between Baku and Yerevan had given way to renewed friction over Nagorno-Karabakh by the end of 2019. Frequent violations of the ceasefire on the Nagorno-Karabakh line of contact are continuing, and both countries will increase their military budgets again in 2020. The economic focus remains on the hydrocarbons sector, where the Hungarian company MOL signed an agreement with Chevron in late 2019 to buy a 9.6% stake in the BP-led Azeri-Chirag-Gunashli (ACG) consortium and an 8.9% stake in the Baku-Tbilisi-Ceyhan pipeline that transports crude oil to the international market. MOL now holds the third largest stake in ACG, whose operating licence has been extended to 2049. ExxonMobil is still looking for a buyer for its slightly smaller stakes in the same assets.
Expropriation Risk 53 (Significant) TREND ► ►
A central reason for the difficulty in expanding the non-oil sector remains the country’s opaque bureaucracy and the extent to which this part of the economy is dominated by a small group of government-connected companies that remains untroubled by a tame judiciary. The head of the country’s largest bank, IBA, has said its restructuring is now complete. The government, which owns 95% of the bank, is currently preparing IBA for privatisation, a process which President Aliyev began in 2015 and which may produce an offering during 2020. If so, the response will offer a sense of how far the government has been able to allay investor concerns.
There is also likely to be more emphasis on the petrochemical sector, which the government hopes will yield higher margins from oil by turning local crude production into plastics for export.
Political Violence Risk 42 (Medium) TREND ▲ ►
Police violently dispersed two peaceful protests in central Baku in October, after the authorities had turned down requests for permits to hold the rallies. The first, organised by an umbrella group of opposition parties and activists, protested against low salaries and corruption while calling for the release of political prisoners. According to the police, 60 of approximately 220 participants were detained, although other reports suggest that both figures were higher. Video of the violent treatment of those detained was posted on social media. The second was held by several dozen women’s rights activists on the following day to protest domestic violence. The rough manner with which the police dispersed both protests was clearly meant to discourage further demonstrations, and the ban on protests in central Baku will continue.
Terrorism Risk 43 (Medium) TREND► ▲
The government is seeking to shape and control a moderate Islamic narrative by introducing mandatory religious education in universities from 2020. The course will cover Islam as well as all major religions, and similar classes are also expected to be taught at primary and secondary levels. The government has become more selective in using the threat of terrorism for domestic purposes as it seeks to develop tourism as a key sector of the economy, but concern persists about the possible return of some of the hundreds of Azerbaijan citizens who joined Islamic State in recent years.
Exchange Transfer and Trade Sanctions Risk 52 (Significant) TREND ▼ ►
A series of cuts during the second half of the year, with the most recent coming in December, saw the central bank’s benchmark rate end 2019 at 7.5%. This has been made possible by a fall in inflation to below 3% and the relative stability of the manat. The full transition to the floating exchange rate regime is still planned for 2020. After the success of enabling people to apply for government documents such as driving licences online, which has produced an appreciated reduction in petty corruption, the central bank may approve the online opening of bank accounts in 2020.
Sovereign Default Risk 44 (Medium) TREND ► ▲
The current account balance remains healthy as gas output increases and currency reserves grew by more than 10% during 2019, ending above six billion dollars. Legislation introduced in 2018 now sets a ceiling on the debt-to-GDP ratio of 30% until 2025, and the government admits that the costs of restructuring IBA will take it close to that limit in 2020. While Azerbaijan remains capable of borrowing externally, its international financing is increasingly concentrated in institutions that are not Western led. Commercial lenders remain concerned about the country’s banking sector, the state of governance, and the persistent dependence on hydrocarbons.
