STABLE FORECAST

Compared to 2020, when all talks in Azerbaijan, like in the rest of the world, were on the economic consequences of the pandemic, in 2021 the emphasis largely shifted to issues of recovery and recuperation, despite the ongoing lockdown restrictions. In 2021, Azerbaijan's GDP increased by 5.6% after a fall of 4.3% in 2020. Overall, the past year was very rich in economic events, including extensive reconstruction works initiated in the liberated lands, transportation of the 500 millionth tonne of oil through the Baku-Tbilisi-Ceyhan pipeline, signing of an agreement between Azerbaijan and Turkmenistan on the joint development of the Dostlug field in the Caspian, a new gas agreement with Turkey, and the first private investments in renewable energy sector. Apparently, the year of 2022 had a very good start and the outlook is quite encouraging.

Five percent GDP growth

The pandemic has clearly demonstrated how strong individual economies depend on global processes. Therefore, we should review last year’s achievements in a global context. Well, it is not encouraging yet given that anti-COVID restrictions still remain in place everywhere and governments continue to roll back fiscal support programmes. Let alone inflation, which is a major hit in macroeconomic indicators in almost all countries.

Thus, IMF expects global growth to deteriorate from 5.9% in 2021 to 4.4% in 2022 (World Bank says 4.1%). WB analysts believe that the growth rate of economies will return to the pre-pandemic average. At the same time, they will be higher in developed countries than before and lower in developing countries. At the same time, the latest IMF analysis expects a longer period for high inflation rates than they previously assumed.

In case of Azerbaijan, the outcome of 2021 was impressive, as the country’s GDP growth exceeded 5%. “This is an excellent result, especially for a post-war country. Non-oil sector grew by 7.2% last year,” President Ilham Aliyev said in his interview with local television channels.

According to Mr. Aliyev, industrial production in 2021 grew by more than 5%, while non-oil production—by almost 20%. Non-oil exports reached a historic $2.4bn. The country has never hit this indicator in the history of independence; the previous record was $1.9bn.

As for forecasts, international financial institutions forecast a 3% average growth rate for the Azerbaijani economy in 2022, which is more than the average of the last decade. Government of Azerbaijan is optimistic by 0.9% and forecasts an average annual GDP growth rate at 4.2% in 2022-2025. By the way, UN analysts attribute approximately the same indicators to Azerbaijani economy: World Economic Situation and Prospects 2022 report indicates 4% GDP growth in 2022.

These forecasts depend heavily on the energy market situation as well, as oil and gas exports account for almost 90% of Azerbaijan's exports and 50% of GDP. The situation is more than favourable, with the average price of Brent in 2021 at $71 per barrel (compared to $43 in 2020). S&P forecasts that in 2022 it will average $75 per barrel. This will benefit the economic, fiscal and payment performance of Azerbaijan, especially as oil production in the country this year should reach 0.77mbpd. Prospects of Azerbaijan's gas sector are also favourable, as gas production increased by about 73% between 2017 and 2021 and will increase by another 20% until 2025.

Hit of the season: Inflation

What is a crisis without a rise in prices of consumer products? Especially during such a severe pandemic crisis, when demand has fallen, production and trade links have been disrupted, purchasing power has declined... In Azerbaijan, the average annual and annual inflation rate for 2021 were 6.7% and 12%, respectively. This was the highest indicator since 2016-2017 (12.9% in 2017), when prices rose significantly after the devaluation of manat in 2015. This is an unpleasant, albeit expected, fact amid global trends.

But according to the World Bank, inflation reached a ten-year high in many countries last year. Eighty percent of emerging markets have suffered from a sharp increase in inflation rates in the past few months, with a third of these countries having double-digit rates. In the US, annual inflation rate hit a 40-year high of 7%, in the Eurozone—5% (a record for the last 31 years), in Russia—8.4% (in 7 years), and in Kazakhstan—8.4% (in 6 years). We still remember what happened in Turkey, when prices reached a 19-year high of 36.08%.

Incidentally, it is these scaring processes that have forced governments to suspend stimulus programmes and financial support measures to avoid flooding the market with liquidity.

According to IMF analysts, inflation rates should drop as supply chains normalise, monetary policies tighten and the balance of demand and consumption shifts towards services. It is also expected that the rapid rise in fuel prices slows down in 2022-2023, which will help contain overall inflation.

While the Azerbaijani government forecasts a 4% inflation rate for 2022,  CBA investigated recent trends and forecast average annual inflation rate at 7.5%. “This year annual inflation in Azerbaijan is expected to be above the target range (4+/- 2%): 6.6-7.5%,” said Governor of CBA, Elman Rustamov, at a press conference. He added that as early as in 2023 the CBA forecasts show average annual inflation rate close to the target range.

The government will fight this process thanks to a package of anti-inflationary measures and by preventing artificial price increases.

To maintain stability

As in previous years, protecting financial stability will continue to be a priority for the Azerbaijani government. High energy prices will help to maintain the stable exchange rate of the national currency. There are other factors that influence the exchange rate of manat, including the appreciation of the US dollar and changes in the exchange rates of currencies in neighbouring Kazakhstan, Russia, and Turkey. 

Central Bank of Azerbaijan closely monitors the stability of the exchange rate, regulating it through exchange rate interventions when necessary. In addition, the recognition of manat as the most stable and reliable currency in the region enhances its payment and savings functions.

President Ilham Aliyev also noted that manat's exchange rate has been stable for many years: “People's confidence in manat has increased significantly, the volume of bank deposits in national currency is increasing, which is to our advantage in the overall deposit balance. Stability of manat is also very important for investors, as it affects the growth of foreign investments,” said Mr. Aliyev.

For reference: In 2021, foreign currency deposits of population decreased by 8.7%, or up to 41% of all household deposits, while in 2020 the share of foreign currency deposits was 50.8%, CBA reports. However, the volume of deposits in national currency increased by 35.4%, or up to 59% of all deposits.

S&P also believes that Azerbaijan will maintain a de facto peg of manat to the US dollar at 1.7 manat/$1 supported by the regular CBA interventions in the foreign exchange market.

At the end of 2021, CBA's foreign exchange reserves exceeded $7bn (+$2.5bn). They’re expected to grow by at least half a billion more this year.

“I instructed the government to prevent the drop of foreign currency reserves and, if necessary, to reduce investment spending. Growth of foreign currency reserves gives us economic independence, which is a basis of our political independence. Azerbaijan is one of the rare countries, which has a positive balance of foreign trade: in many countries import exceeds export, while in our country in 2021 export significantly exceeded import — by more than $10 billion,” President Ilham Aliyev said.

Azerbaijan's strategic foreign exchange reserves now exceed $52bn, of which over $45bn are provided by the State Oil Fund of Azerbaijan. The rest of this volume is provided through CBA.

Long-term rating

Maintaining foreign currency reserves is very important. This has not been possible in recent years amid the pandemic, the Garabagh war and other issues related to the reconstruction of the liberated territories. Either way, these reserves form the strongest buffer that reflects both external and internal economic negatives, keeping the situation stable. Therefore, according to experts, a moderate approach to the use of these funds will continue to prevail over say a momentary desire to stop inflation rate fluctuations.

This position also determines the forecasts and assessments of international analysts regarding the situation in the national economy. “We believe that Azerbaijan's budgetary and external fiscal position remains one of the strongest among sovereign nations, which we rate in the BB category. The government has substantial liquid government assets at its disposal, projected on average around 70% of GDP by 2025,” S&P Global Ratings stated to explain its decision to affirm the long-term foreign and local currency Issuer Default Ratings (IDRs) of Azerbaijan at BB+/B. The outlook on ratings is confirmed at 'stable'. The agency estimates Azerbaijan's government debt to be below 30% of GDP in the medium term, which is known to be more than satisfactory.

It is also very important that CBA has a very cautious policy regarding the interest rate, which also acts as a macroeconomic indicator in Azerbaijan. So, in late January it was raised again by only 0.25% - to 7.5% with the lower threshold of the interest rate corridor remaining at 6%, the upper limit was raised from 8.25% to 9%. This was the fourth interest rate increase by CBA since autumn 2021.

In short, indicators show that Azerbaijan is leaving behind the problems of the last two years related to the pandemic and the war in Garabagh fairly confidently and without major losses. And as long as the country is able to repel negative economic situations without external support and, moreover, help friendly countries to solve them, it will be safe from crises, even global ones. After all, any crisis can be turned to your advantage if you wish and are able to do so.