OPPOSITE EFFECT

International analytics have common forecasts on the global macroeconomic situation, which looks quite pessimistic, to say the least. The unfavourable geopolitical situation amid the Russia-Ukraine war, the pandemic shock on the global economy and its ongoing consequences, the reshaping of trade markets and a number of other negative factors have created a set of problems the global economy was not prepared to withstand. As a result, the global gross domestic product (GDP) is forecast to almost halve on the back of rising inflation, unemployment, etc.

On the contrary, Azerbaijan's GDP (a record $80 billion in 2022) is expected to rise by 2.7% in 2023.

Pessimistic forecasts

The global geopolitical situation remains tense. Analysts believe that the effect of the Russian-Ukrainian war will affect economic processes in the future as well. Serious changes in the energy market, banking sanctions and currency wars significantly affect the macroeconomic processes.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), is confident that the recession will affect a third of the world economy this year, and it will be tougher "than the one we left behind". "Why? Because the three major economies - the US, the EU and China are slowing down at the same time," she told CBS.

IMF analysts believe that global GDP will increase by 2.7% this year after growing by 3.2% in 2022.

Another major financial institution, the World Bank (WB), has also sharply cut its global economic forecast for 2023 on the back of persistently high inflation. The WB stopped at 1.7%, while a growth of 3% was expected in June 2022.

Fitch Ratings worsened their forecast for 2023 to 1.4% from the expected 1.7% in September and noted the tightening of monetary policy by global central banks and the unfavourable situation on the Chinese real estate market.

"Containment of inflation has proved more difficult than expected as the price pressure has widespread compelling the central banks to adopt tougher measures. This is a hardly positive sign for economic growth," the IMF study says.

Due to the ongoing conflict, Russia and Ukraine, as well as the associated economic region will experience the hardest hit by recession.

WB analysts believe that the Russian economy will shrink by 3.3% this year after falling by 3.5% in 2022. The IMF chief, however, is confident that half of the EU, which has been hit hard by the conflict in Ukraine, will be in recession.

"For the first time in 40 years, China's growth in 2022 is likely to be at or below global growth. Before the pandemic, China was providing 35-40% of global growth. It won't be like that anymore,” Georgieva said.

Fitch believes that Chinese GDP will only increase by 2.8% this year as the high incidence of COVID-19 will continue to affect business activity in the short term.

Even in countries with stable economies "hundreds of millions of people will feel it as a recession", said the IMF chief.

Inflation is a major problem

Inflation will remain a major macroeconomic scourge. Last year, global food prices rose by 14.3% compared to 2021, according to the FAO (UN Food and Agriculture Organisation).

Bloomberg Economics forecasts a tightening of monetary policy by leading central banks, including the US Federal Reserve (Fed) and the European Central Bank (ECB). The agency has analysed the monetary policy of 23 global central banks. It is expected that the majority of them (12) will continue to raise rates, while nine will begin to reduce them, and the remaining two will hold the rates at current levels.

The overall global interest rate level is expected to peak at 6% in the third quarter and then fall to 5.8% by the end of 2023. This will be the highest level since 2001 (currently 5.2%).

A report by the international ratings agency Standard & Poors argues that a stronger dollar in Europe could add to the inflationary pressure. Given expensive energy sources mainly bought in US dollars, the depreciation of European currencies increases inflation and makes it difficult for the ECB to stabilise prices.

According to S&P, efforts of central banks to reduce inflation suggest that discount rates should be even higher. "The sharpest rise in rates in four decades combined with ongoing geopolitical tensions and energy supply constraints due to the Russia-Ukraine war means a sharp slowdown is almost inevitable," S&P said.

Being part of the global economy and in the same economic region as Europe and Russia, Azerbaijan will eventually continue to experience strong negative external pressure.

It is clear that inflation expectations in the country continue to be high amid rising prices for important commodities on global markets. According to published statistical data, in the first 10 months of last year alone, the annual rise in prices of imported goods was 22.1%. "A survey of households in December showed that 81.9% of them expect inflation. At the same time, 22.4% of respondents believe the inflation rate will accelerate," says the CBA statement on key monetary policy directions for 2023.

"The world has just started to adapt to the post-pandemic period, with many countries, including Azerbaijan, experiencing dramatic price increases. Our economy is part of the global economy and, unfortunately, we are also exposed to this negative impact. But we are trying to ease the situation for the population. The large social package which I recently signed proves this," President Ilham Aliyev said in his interview with local TV channels. He added that inflation in Azerbaijan was mainly imported and by the end of 2022 the annual average level of inflation was 13.9%.

Azerbaijan breaks records

Yet all these external effects did not prevent Azerbaijan from hitting a record GDP indicator of ₼134b, or $80b. According to international forecasts, the trend will continue this year as well.

According to WB, in 2023 Azerbaijan's economy will grow 2.8%, which is 1.1 percentage points higher than in the world and 2.7 percentage points higher than in Europe and Central Asia. Compared to the June 2022 forecast, Azerbaijan is one of the four countries in Europe and Central Asia in terms of real GDP growth dynamics in 2023, Agil Asadov, head of department at Economic Reforms and Communications Analysis Centre explained.

Fitch Solutions reports look even more optimistic: the agency predicts a 3.7% increase in Azerbaijan’s GDP for 2023, as lower oil and gas prices in 2023 will put some pressure on Azerbaijan's energy sector, which accounts for almost 50% of the country's GDP.

Meanwhile, one of the most prestigious economic and business think tanks in London, the Centre for Economic and Business Research, is confident that Azerbaijan's average annual GDP growth rate will not fall below 2.5% in 2023-2027, with nominal GDP rising to $112bn in 2037.

The important components of economic growth (foreign exchange reserves, external debt, exports, etc.) indicate that the forecasts are justified and even restrained.

"Azerbaijan’s foreign trade turnover has increased and exceeded $50b, with foreign trade surplus reaching $25b. Those who deal with economy know what these indicators mean,"  President Ilham Aliyev said. Undoubtedly, this factor creates an additional safety cushion for the national economy amid global challenges.

President Aliyev also made comments on Azerbaijan’s foreign debt. According to him, it was below $7b in 2022. "In terms of GDP, this indicator was 9.5% at the beginning of this year and 17% at the beginning of 2022," Aliyev said.

Over the year, the CBA foreign exchange reserves rose by $1.9b reaching almost $9b. Given that the Central Bank had to introduce rather strong measures to repel pressure on manat last year, these figures look commendable.

Another record was the volume of non-oil exports from Azerbaijan in 2022—almost $3b, which is 10.3% more than in 2021, Agency for Export and Investment Promotion (AZPROMO) reports. Azerbaijan’s Economy Minister Mikayil Jabbarov said that the volume of commodities exported by Azerbaijan has increased by 12%, while the share of industrial products in non-oil exports exceeded 62%. "This is also a very good indicator. The remaining 38% are exports of farming products, including processed products,” Jabbarov said.

According to experts, all these figures demonstrate the stability of Azerbaijan's economic development model and its adaptive and adequate response to external shocks. This year Azerbaijan is expected to continue to curb strong external challenges by implementing measures to reduce import dependency and ensure food security. This is the only way to reduce the effect of external economic shocks on the national economy and maintain its stable growth in the upcoming difficult years for the global economy.