STRONGEST LINK

Nouriel Roubini, a professor at New York University, a former adviser to the US Treasury and IMF advisor, warned in 2006 that a new financial crisis awaited the world. At a peak of economic growth at the time, Roubini's statement was ridiculed. But it took less than a year for the economist's forecasts to come true.

Delivering a new forecast, Roubini described the budgetary policies of the USA and Japan as "unsustainable" and warned that the crisis may affect these states again. "Markets are concerned about the situation in Greece, but Greece's debts are just the tip of an iceberg of growing debt problems around the world," said the professor. In his view, it is becoming increasingly evident that America will experience "something serious" in the next two or three years.

The events surrounding Greece showed everyone that in just 4 months, a sovereign rating could collapse from AAA to the "trash" category. We can therefore say that the global crisis is entering a new phase.

The scale of measures taken by Europe to save Greece (an aid programme totalling 110 billion euros) and to support the euro (a stabilization mechanism amounting to 750 billion euros) clearly illustrates that the global economy is facing a second wave of financial crisis. If a small country like Greece presents such enormous challenges for the European economy, this suggests that the global financial system is poorly monitored and regulated.

The crisis revealed such a large number of structural weaknesses in the socioeconomic system of the European Union and the West in general that it is time to talk about a collapse in the modern understanding of the idea of the welfare state. Most vulnerable is the European post-modernist socialist model, but this does not mean that others are without problems. The US and Japan are actually on the verge of economic collapse due to accumulated state debt. So the developed countries will have to take the path of austerity and more labour-intensive work. The era of prospering on credit and by moving operations to poor countries is over. But the unrest in Greece showed that not all Europeans are prepared to stoically stand by as the state cuts spending.

The economic situation is very difficult in Spain, Portugal and Italy which, together with Greece, form the so-called group of "southern" EU countries. The governments of these states have allowed significant budget overruns. Their budget deficits in 2009, according to the European Commission, were as follows: 13.6 per cent of national GDP in Greece, 11.2 per cent in Spain, 8 per cent in Portugal and 5.3 per cent in Italy.

What is the situation in Azerbaijan's economy in the context of the ongoing global financial crisis? Let's take a small digression into the economic history of Azerbaijan, which opted for a market economy at the dawn of its independence. The experience of several countries shows that a market economy cannot be built without creating a strong state. Today that is an axiom. At the initial stage of market relations, it was erroneously declared that the state should reduce its regulatory pressure. But we have to acknowledge the correctness of statements by scientists who pointed out that an efficient market does not develop by itself; it results from the activities of the state and reasonable legislation.

The Azerbaijani Constitution states that the guideline for development is a socially-oriented economy, that is, there is certainty in the choice of the national model of economic development - namely, a socially-oriented market economy model whose main purpose is to modernize the country.

The most important element of the Azerbaijani model of socioeconomic development was the development of the oil strategy, created by national leader Heydar Aliyev.

As a result, today Azerbaijan has 27 signed contracts with foreign companies to develop oil fields and structures, in which $30 billion have been invested. Over 80 per cent of the oil and 70 per cent of the gas comes from foreign consortia developing the country's fields. In 2009, for the first time in the history of Azerbaijan, 50.4 million tons of oil and 23.7 billion cubic metres of gas were extracted. Thus, thanks to Heydar Aliyev's far-sighted policy and President Ilham Aliyev's work, Azerbaijan has become an energy producer of global significance.

Azerbaijan was also one of the first countries to join the Extractive Industries Transparency Initiative. The memorandum of understanding includes 26 oil and gas companies operating in our country. In 2007, the UN awarded the State Oil Fund of Azerbaijan a special prize for achievements in the transparency of oil revenues.

At the turn of the millennia, Azerbaijan was also very actively involved in the implementation of transport and communication projects. For example, the Baku-Tbilisi-Ceyhan oil pipeline was commissioned in 2006, and 2007 saw another historic event - the beginning of gas exports from the Sah Daniz field via the Baku-Tbilisi-Erzurum gas pipeline. Work is also underway to build the Baku-Tbilisi-Kars railway and upgrade the infrastructure of the TRACECA and North-South transport and communication corridors. Thus, Azerbaijan, known for its oil worldwide, has become an important transit country, without which not a single regional project can be fully implemented.

In order to accelerate market reforms, an institutional basis was formed for the national economy and the tax system was virtually re-created, including the system of tax administration - one of the most important pillars of a market economy. A new budget system, with treasury budget execution, a banking system and financial markets have also been created.

As a result of successful reforms, the country's economy was the fastest growing in the world. For example, GDP growth in 2005 amounted to 26.4 per cent, 34.5 per cent in 2006 and 25 per cent in 2007.

Despite the outbreak of the global financial crisis in mid-2008 and falling oil prices - our main export produce - the volume of Azerbaijan's GDP that year increased by 10.8 per cent and totalled 38 billion manats. In 2009, growth in Azerbaijan's GDP amounted to 9.3 per cent, while average annual inflation did not exceed 1.5 per cent.

The consistent policy of supporting private enterprise has also borne fruit: their share in GDP accounted for 81.2 per cent in 2009. GDP growth in six months of 2010, compared to the same period last year, accounted for 3.7 per cent, including 4.7 per cent in the non-oil sector.

Positive changes are taking place in the state budget as well: from 2005-2009, budget revenues and expenditure increased almost 5-fold. In 2009, the revenues of the country's budget amounted to 10.3 billion manats and expenditure - 10.6 billion manats.

The achievements in the national economy caused the state budget to be socially oriented, which enables systematic increases in salaries, pensions and social benefits. For example, for the period 2007-2009, the average nominal wage rose from 215.8 to 298.0 manats and pensions - from 41.1 to 100.4 manats. The level of poverty in the country fell from 29.3 per cent in 2005 to 11 per cent in 2009.

During the first half of 2010, the average nominal wage grew by 5 per cent and reached 315.2 manats, compared with the same period last year.

In 2009, the country created more than 73,600 jobs, including 54,500 permanent ones. About 80 per cent of the new jobs were created in the country's regions. During 2009, more than 5,300 new enterprises were commissioned and 37,900 people set up businesses.

The favourable investment and business climate in the country contributed to the formation of large and medium-sized financial-industrial groups of a new type, including the most famous ones - Gilan Holding, the Azersun Holding Group of Companies, Akkord, Pasha Holding, Ata Holding etc.

As the national economy develops, Azerbaijani business is starting to participate in investment projects abroad. For example, SOCAR has invested in the economies of Georgia and Turkey and plans to invest in projects in Romania and Ukraine, i.e. it has become a trans-national corporation.

Azerbaijan is a member of several regional integration alliances - ECO, BSEC, GUAM and the CIS. Through the development of economic ties with countries that belong to these alliances, Azerbaijan seeks to integrate into the global economic system.

Thus, the above analysis suggests that the Azerbaijani model of socioeconomic development has justified itself, that is it has been a success. Models are successful provided showing that the country's leadership understands the essence of public administration, knows its country and acts in the interests of the absolute majority of the population, taking tactical decisions to meet people's everyday needs, simultaneously concentrating organizational efforts and state resources on strategically important "growth points" in the national economy.

Did the global financial crisis have an impact on the economy of Azerbaijan? It is impossible to give a clear answer to this question. Our country is developing its economy within the globalized and interdependent architecture of the world economy, and of course, fluctuations in currency rates and falling prices for oil - the country's main export product - leave their mark on the national economy. The significant decline in world oil prices led to some cuts in budget and export revenues. It should be noted that a decline of $10 in the price of a barrel of oil means $2 billion for Azerbaijan's balance of payments. A number of companies and banks faced difficulties in extending short-term external liabilities, which caused a shortage of liquidity in these financial institutions and contributed to reductions in credit growth. At the same time, the carefully thought out strategy and effective tactics of the country's leadership minimized the negative impact of the global financial crisis. During this period, the socioeconomic model in Azerbaijan fully demonstrated its superiority in both the post-socialist world and among the new industrial states (NIS) and developing countries. To some extent, this is due to the fact that:

- Azerbaijan's economy has been the world's fastest growing in recent years;

- Shares in Azerbaijani enterprises and banks are not in circulation on the world's exchanges and the investment portfolios of Azerbaijani banks are not included in the scope of shares in large financial institutions;

- A balanced policy is being implemented in the sphere of foreign borrowing (government debt amounts to $ 2.9 billion, or 8.4 per cent of GDP, $333 per capita). A flexible fiscal policy and prudent policies in the area of mortgage lending are also being implemented.

The government successfully implemented the following immediate crisis measures: 

- Limited the impact of the significant drop in world oil prices on the budget and allowed the State Oil Fund to transfer resources to the state budget;

- Made large capital investments in the economy and provided government guarantees for loans;

- Adapted to low revenues by reducing non-priority expenditure and financing only current capital investment projects.

As a result of these measures, the government managed to maintain the budget deficit as a whole at a stable level and thus increase social spending. The state budget for 2010 provides for reductions in the budget deficit, while allowing for tax cuts.

It should be noted, however, that the Central Bank of Azerbaijan is pursuing a stable and flexible monetary policy. The CBA has a coordinating function and consistently analyzes bank liquidity and capital options. Another factor for the security of the country's banks is that foreign lending accounts for only 18 per cent of the assets of the country's banks, while this rate in, say, Kazakhstan, is set at 78 per cent.

While maintaining a stable exchange rate for the manat, the CBA ensured the liquidity of the banking sector. To overcome the deterioration of liquidity and the tightening of credit conditions, from September 2008 to December 2009, the CBA reduced reserve requirements on deposits from 12 to 0.5 per cent and reduced the refinancing rate from 15 to 2 per cent. This reduction in interest rates allows commercial banks to keep lending at the same level.

In addition, the CBA allocated nearly $1.1 billion (2.6 per cent of GDP) to maintain the liquidity of banks facing temporary liquidity problems. Finally, the maximum amount of deposit insurance was increased 5-fold, which helped to strengthen public confidence in the country's banking system.

Despite the global financial crisis, the favourable macroeconomic dynamic in Azerbaijan has largely been preserved. This is proved by the reviews of international financial organizations. For example, in 2010, the international rating agency Fitch upgraded the long-term Issuer Default Ratings (IDR) of Azerbaijan in foreign and local currency from BB+ to the BBB- investment grade. The rating forecast is "stable": the ceiling of Azerbaijan's country rating was upgraded from BB+ to BBB-, while the short-term foreign currency IDR moved from B to F3. The fact that Fitch increased Azerbaijan's sovereign rating to investment grade reflects the rapid growth of oil revenues and sensible management of these revenues, which are being used to build a strong position for the country as a public and external net creditor, says Fitch in its conclusion on sovereign ratings.

The global financial crisis was a difficult challenge for most countries. But it was the crisis that proved the stability of the Azerbaijani economy and, for the first time in its recent history, the country received an investment-grade rating.

Today, Azerbaijan, unlike other countries, does not flinch before the global financial crisis and, moreover, by maintaining high economic growth and a sustainable rate for the national currency, it is now a creditor state on the world stage.

Analysis shows: the Azerbaijani model of economic development stood the test of the global financial crisis with credit. Azerbaijan is able, without appealing to any state or donor, to protect its national economy, macroeconomic stability and path of development. Today this has been proven once again, because it was during the worst crisis year that Azerbaijan improved its international credit rating.