Previous Quarterly Editions
Expropriation Risk: 56 57 55 53 Political Violence Risk: 40 43 43 42 Terrorism Risk: 46 46 44 43 Exchange Transfer and Trade Sanction Risk: 55 54 54 54 Sovereign Default Risk: 45 45 44 43
TREND ▼ OUTLOOK ►
Economic growth of 3% in the first quarter of 2019 suggests that the country is continuing to recover from the 2015-16 recession, but it still faces a legacy of higher debt and a fragile banking sector. The hydrocarbon sector remains the main driver of economic performance, with oil and gas production consistently accounting for around two-thirds of fiscal revenues and 90% of exports. These figures will only increase as the country’s gas exports grow in volume and value. Transport infrastructure projects, such as the Qazvin-Rasht railway line opened in March connecting Iran to the Astara line in Azerbaijan and forming a segment of the International North-South Transport Corridor, are key strategic priorities as they develop the economic relations with neighbouring states while deepening Armenia’s regional isolation. Friction with Armenia remains a central preoccupation in Baku. Despite a new government in Armenia and a marginal improvement in formal dialogue, both countries have increased their military budgets for 2019. Azerbaijan is concentrating on diversifying its arms suppliers and held large-scale military exercises in March ahead of talks between President Ilham Aliyev and Armenian Prime Minister Nikol Pashinyan. That meeting ended with a pledge to continue talks, although a breakthrough remains unlikely while violations of the ceasefire along the line of contact between Azerbaijani and Armenian troops remain frequent. The government expects inflation, which reached 13% in 2017, to be below 4% by the start of 2020. Azerbaijan's current account balance has been in surplus since the second quarter of 2017, and stable oil prices and a rise of 20% in gas output from Shah Deniz 2, the country’s most important offshore gas field, could push the current account surplus above 10% of GDP this year. State oil company SOCAR and its partners at the BP-led Azeri-Chirag-Gunashli (ACG) consortium are expected to acquire the stakes in ACG being sold by ExxonMobil (6.8%) and Chevron (9.6%). The government sees continued investment in ACG as essential to prolonging the life of its fields and stabilising production levels. April saw final approval for the Azeri Central East platform, which will cost 6 billion dollars and should produce 100,000 barrels per day at peak levels. Baku hosted the March meeting of OPEC+, with OPEC Secretary General Mohammed Barkindo holding talks with President Aliyev. However, there is no indication that Azerbaijan plans to apply for membership of the full OPEC group although the country continues to adhere to its OPEC quotas.
Government efforts to attract more investment by implementing a series of reforms in construction permits, tax payments, border trade, property registration and access to credit have put Azerbaijan among the ten most improved countries in the World Bank’s Doing Business 2019 report. In an effort to diversify away from hydrocarbons, the government has also been investing heavily in tourism, agriculture and construction. The government has extended the Formula 1 Grand Prix contract until 2023, which should help increase the number of tourists visiting Azerbaijan from 2.8 million in 2018 to over 4 million by 2023, and the country hosted UEFA’s Europa League final at the end of May. Less stringent rules of entry have been attracting tourists from the Middle East, Russia and Iran throughout the year, and new direct flights to Baku are coming into service this year. These efforts to diversify the economy are gaining some traction, although the non-oil sector is unlikely to contribute more than 4% of GDP in 2019.
It is still difficult for civil society to operate in Azerbaijan, with journalists and human rights campaigners facing prosecution and prison. However, international attention appears to have encouraged Aliyev’s pardoning in March of over 400 people including 55 political prisoners ahead of the Nowruz holiday. The EU has consistently pressed the government over human rights issues as part of the comprehensive bilateral agreement that is being negotiated. The European Court of Human Rights (ECHR) has made two rulings against Azerbaijan so far this year that require it to pay compensation to citizens harmed by the state. Although the decisions of the ECHR are legally binding, the government often delays paying compensations to political activists in order to deny them the financial means to continue their activities.
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. The major fire that broke out in one of Baku’s largest shopping malls in March was quickly blamed on the building’s non-compliance with fire safety regulations rather than an act of terrorism. The protests that followed power outages in Ganja in mid-2018, which the authorities described as the work of radical religious groups, have not been repeated.
TREND ► OUTLOOK ▼
The manat has remained relatively stable since moving to a managed float at the end of 2017, propped up by gradually recovering oil prices and continuing interventions by the central bank. The full transition to the floating exchange rate regime is currently planned for 2020. The country’s largest bank, IBA, is going to the UK Supreme Court to appeal the decision by a lower UK court to back opposition by Russian lender Sberbank and asset manager Franklin Templeton over the implications of its debt restructuring plans. Privatisation of IBA, in which the Finance Ministry still holds a 90% stake, is still expected to begin this year.
TREND ▼ OUTLOOK ▲
Foreign exchange reserves amounted to 5.5 billion dollars at the end of October, an increase of 6.5% year-on-year, and are projected to reach 6.7 billion dollars by the end of 2019. While Azerbaijan remains capable of borrowing externally despite a sub-investment credit rating, its international financing is increasingly concentrated in non-Western institutions as other lenders worry about the weak banking sector, poor governance and the continuing dependence on hydrocarbons.
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