WAY OUT OF CRISIS

Despite the arrival of the long-awaited coolness in Azerbaijan, the economists are still going through "hot" days. Falling oil prices, crisis trends in the Russian, Chinese and a number of European economies, the depreciation of national currencies in trade partners - these are the most important factors stirring up the economic community over the last couple of weeks. The uncertainty on the global oil and foreign exchange markets and gloomy predictions of foreign experts have plunged the society into the mood of preparedness for a new depreciation of the manat. However, while official bodies stop short of comments and forecasts, analyst predictions are mostly optimistic - the Azerbaijani economy can survive this wave of negative impact from the outside, they said.

Last Saturday, the international rating agency Fitch Ratings confirmed the long-term issuer default ratings (IDR) of Azerbaijan in foreign and local currencies at "BBB-", a "stable" outlook. Against the background of external instability today, this assessment really means a lot, especially in terms of attracting foreign investment.

"The stable rating reflects the low level of public debt (14 per cent of the GDP) and a large stock of net foreign assets (72 per cent of the GDP) accumulated thanks to a double-digit surplus of current operations and high oil prices since 2006. This affirmation reflects our expectations for adjustments in investment spending and tax revenues, which will enable preservation of these buffers," said the agency.

At the same time, authors of the rating, of course, do not forget about the oil factor, namely highlighting that the country's dependence on oil and gas is a key rating weakness.

Nevertheless, experts of the reputable agency believe that the situation can be improved by improving the fiscal position of Azerbaijan and sustainable diversification of the economy through reforms aimed at improving the quality of governance and transparency. According to Fitch, the real growth of the non-oil sector in 2015 will reach 5 per cent and real GDP growth 2.3 per cent. Already in 2017, non-oil sector revenues are projected at 15 per cent of the GDP. Given all this, Fitch expects that in 2015 consumer prices in Azerbaijan will increase by 5.5 per cent on an annualized basis, which in principle is proportionate to government forecasts.

At the same time, the share of oil revenues will markedly decrease - by up to 20 per cent of the GDP, which will lead to state budget deficit of 4 per cent of the GDP (2.3 bn manats) based on current oil prices.

It should be noted that the government has drawn conclusions from the current situation on the oil market and the draft budget for the next year is based on the price of oil of $50 per barrel. This will help in 2016 to achieve a 100-per-cent execution of the budget revenue plan and in 2017, according to Fitch, it will be possible to achieve a surplus of 4 per cent. Of course, this will be possible if the low oil prices fluctuate only in the current range.

This will also enable the country to fully save the assets of the State Oil Fund of Azerbaijan (SOFAR), whose transfers cover the budget deficits.

The conclusions of Fitch, as has been said, are quite optimistic, but we should not forget that the agency analysts proceed from the current situation on oil markets. In this context, it is hard to give any definite predictions for the medium term. And this means that there is no unambiguous answer to the question whether the situation on stock exchanges can force a new depreciation of the manat.

Depreciation is a natural process in a particular economic situation, despite the fact that it has a negative impact, initiates dollarization of the economy, growth in consumer prices and deterioration of the situation in the banking sector. Thus, according to Fitch, the weakening of the manat in February by 34 per cent led to the fact that the share of foreign currency deposits in Azerbaijani banks reached 73 per cent in April-May compared with 51 per cent at the end of January this year. The agency believes that a small volume of the banking sector will enable the government to provide it with necessary support.

At the same time, according to analysts, the Central Bank of Azerbaijan today has all opportunities to prevent the depreciation of the currency - the current situation is fundamentally different from that of February.

The main difference from the situation that occurred in February is the amount of the manat mass in population hands today. On 1 February 2015, the structure of population deposits was as follows: 60 per cent in manats and 40 per cent in foreign currency. On 1 July of this year, the situation changed dramatically: 72 per cent of all deposits were in foreign currency and only 28 per cent in the national currency. This means that people will not lose anything from depreciation, and therefore the government will not have to bear additional costs to cover their losses.

In addition, this category of the population is not very fussy, as it did not withdraw its deposits from banks even during the February depreciation.

The February depreciation of the manat was also necessitated by filling the state budget with transfers from the State Oil Fund. The country's budget and SOFAZ are based on the oil price forecast of $90 per barrel, and the depreciation gave the government the opportunity to almost fully cover the difference between the target price and the average oil price on world markets.

Also, against the backdrop of significant financial challenges in a number of oil-exporting countries, Azerbaijan continues to have a positive balance of foreign trade operations. Thus, many oil-exporting countries have a foreign trade deficit due to the sharp decline in financial revenue from the sale of oil on world markets. In Azerbaijan, at the end of July 2015, Azerbaijan's exports were twice as high as imports.

According to the results of seven months of this year, the positive balance in foreign trade has reached $2.167 billion.

The Azerbaijani economy can weather a drop in oil prices, according to various expert assessments, of down to $40 per barrel. Given the fact that the heating season is about to begin soon, it is difficult to see the price of Azerbaijani oil falling to this level for at least several months.

In addition, it is obvious that the government will speed up measures to promote non-oil sector development. In this sense, the current situation on oil markets can even be considered favorable from the standpoint of long-term economic development.