SLOWLY BUT STEADILY

The financial stability established in Azerbaijan after strong currency fluctuations can be clearly seen in the first quarter of this year: Manat’s rate stabilized, the strategic foreign currency reserves began to grow, and foreign trade has a surplus.

However, the dangerous global trend of oil prices falling below $50 per barrel cannot but cause concerns about the prospects of the national economy, which has experienced a very difficult period in the past two years.

Growth of gold and foreign currency reserves

The foreign currency reserves of the State Oil Fund of Azerbaijan (SOFAZ) increased by $60 million, reaching $33.207 billion, according to the results of the first quarter of this year.

At the same time, 2/3 of the investment portfolio is made of short-term assets. This shows that SOFAZ is ready, if necessary, to provide the country's financial market with additional funds if the situation in the world oil market worsens.

Given that the currency reserves of the Central Bank amounted to $4.432 billion in the first quarter, the country's gold and currency reserves increased by $518 million reaching $37.639 billion.

An interesting point: according to the head of SOFAZ Shahmar Movsumov, in the first quarter the Fund transferred ₼2.3 billion to CBA to ensure the economic stability. In 2017, it is planned to allocate ₼7.5 billion in the budget of the fund for these purposes. But, according to Movsumov, the calculations show that this amount will not be required in full. "Yet I cannot tell the final figure now," said Movsumov. So, there are signs of stability.

In the first quarter of the year, Azerbaijan’s foreign trade surplus was more than $1 billion.

The management of the Central Bank stated that if there is not an extraordinary situation in the world economy, following the results of this year, the country's balance of payments will be positive.

The expected threat

Meanwhile, a sharp drop in global oil prices can be a real threat to the national economy. We can see the likelihood of changes in this situation based on the following figures: on May 5, the cost of the North Sea oil mixture fell below $47 per barrel for the first time since November 30, 2016, although a week later it passed a mark of $50.

These fluctuations are expected - the incumbent U.S. President Donald Trump fulfills his election promises to the American producers of hydrocarbon resources. Thus, Trump lifted the ban on oil production imposed by Barack Obama, signing on April 28, 2017, a decree authorizing the extraction of oil and gas in the Atlantic, Pacific, Arctic Oceans and the Gulf of Mexico. At the same time, the fall in oil prices could be more serious, if we recall the statement made by Trump on the social network in March that oil should not be worth more than $25 per barrel.

The aggressive policy of the US leadership to increase oil production, of course, is of great concern to the OPEC countries and other major oil exporting countries. On January 1, 2017, the OPEC member-states and 11 non-member states agreed to cut theoil production by 1.8 million barrels per day. This step was taken due to a need to reduce the excess oil supplies in the market. As a result, the oil price exceeded $57 per barrel in early January 2017.

But the rising oil prices also revived the shale oil production in the U.S. It is clear that the share of the leading OPEC producer (Saudi Arabia) is now declining, while the U.S. has already increased the daily production to 9.3 million barrels thanks to the restoration of the shale oil production. Currently, the oil exporting countries hope that the Arab sheikhs will show restraint and will not rush to pour the world with oil again to ruin companies engaged in the development of shale reserves.

Certainty in this issue can be achieved at the meeting of the energy ministers of the countries involved in the agreement, which will be held in Vienna on May 25 with the aim of discussing the possibility of extending the production reduction contract by the end of the year.

The oil and gas sector exhausts the resource

Despite the fact that the average price for the BTC FOB Ceyhan petroleum mixture in the first quarter of this year was at the level of $55 per barrel, the national economy recorded another decline in its gross domestic product (GDP) in the period under review. According to the State Statistics Committee, by the results of the first quarter the volume of GDP was ₼15.3 billion, which is 0.9% less than the same period in 2016.

At the same time, if the growth of the non-oil sector amounted to 2.4%, then in the oil sector a decrease of 6.8% was recorded. But this is primarily due to a drop in oil production, including for the obligations to reduce oil in the deal with OPEC. It should be noted that this year the Azerbaijani government forecasts GDP growth of 1%. Accordingly, this year it is expected to further increase the rate of GDP development at the expense of the non-oil sector.

At the same time, international financial institutions are even more reserved in their forecasts, and they have a logical explanation for this. Thus, the situation in the Azerbaijani economy is considered in the context of events and forecasts in the whole region. The International Monetary Fund (IMF) in its review "Prospects for the Development of the Regional Economy: The Caucasus and Central Asia (CCA)" notes that, despite recent improvements in the situation in the region, external conditions are expected to remain relatively weak in the medium term. "At the same time, as a result of past external shocks, CCA has become more vulnerable - public debt has increased and the financial sector has weakened. Therefore, the average growth rate of CCA in 2018-2022 is projected at 4.3%, well below 8.1 %, which the region demonstrated in 2000-2014, "the fund emphasizes.

IMF believes that the economic activity in Azerbaijan is projected to recover slowly, being constrained by lower oil production in accordance with the agreement between OPEC member- and non-member states, the impact of remaining factors of financial vulnerability and the expected impact of fiscal consolidation.

Also, the World Bank still predicts a decline in Azerbaijan's GDP in 2017 at 1.4%, but already a 0.6% growth in 2018.

The European Bank for Reconstruction and Development (EBRD) predicts a recession in Azerbaijan in 2017 at 0.5%, and in 2018, GDP growth of 2%. The EBRD stresses that the national currency of Azerbaijan in the first quarter was strengthened against the background of stabilization of oil prices at the level of $50-55 per barrel and the country has sufficient foreign exchange reserves.

The IFIs concerns include the fact that the role of the non-oil sector in the formation of the country's budget is growing noticeably. According to the Ministry of Finance, the state budget revenues in the first quarter of 2017 were ₼3.591 billion, which is 3.4% higher than the forecast, and expenses – ₼3.912 billion (4.5% less). In the revenue part of the budget, the main financial revenues were provided by the Ministry of Taxes (₼1.42 billion), which is 103.8% of the forecast amount. At the same time, the non-oil sector accounted for 67.2%, or ₼954.5 million collected by the tax authorities.

It should be noted that stable oil prices at the beginning of the year prompted a number of proposals by the members of parliament to revise the budget in the direction of increasing revenue and expenditure. The national budget is based upon a forecast price of oil $40 per barrel. However, the latest developments in the oil market have discarded the expediency of this measure. Moreover, there is a distinct tendency to reduce oil production in the sector and thus, despite the growth in oil prices in the first quarter, revenues tend to decrease.

In order to achieve stable growth in non-oil sector revenues and to increase the exports, it is important to prevent the unjustified strengthening of the manat. The fall in oil prices could lead to a weakening of the national currency of Russia and Kazakhstan, so it would be more appropriate to consider this factor when forming a "floating" rate of manat. After all, Azerbaijan’s non-oil products are most successfully sold in the traditional market of Russia and other CIS countries.

In short, it is possible to change the forecasts on the Azerbaijani economy positively for the near future using the appropriate financial instruments and the growth in non-oil exports.