Baku is rolling out bold plans for financial growth and reform. However first, there are worsening regional tensions and forex woes to grapple with. And Covid.
Going through a risky cocktail of pandemic, renewed hostilities with Armenia and financial slowdown, many Azerbaijanis could now view the February 9 parliamentary elections, held a number of months early to enhance “legislative effectivity,” as a missed alternative. The elections did not yield the breakthrough for opposition figures some had hoped for following final October’s appointment of a extra technocratic chief of workers and prime minister.
Contemporary hostilities with Armenia between July 12 and 16 revived the simmering 26-year-old battle between the 2 states, with each international locations declaring martial legislation and mobilizing their armed forces, amid fears the battle might spiral additional uncontrolled. With the world preoccupied with tackling Covid-19, the dangers of a full blown battle close to very important gas and transport infrastructure are very actual. “An enduring implication could also be for the talks between Aliyev and Armenian Prime Minister Nikol Pashinyan,” says Zachary Witlin, senior analyst on the Eurasia Group.
Though Moscow continues to promote weaponry to either side, Azerbaijan more and more views Russia as pro-Armenia, worsening relations between Baku and Moscow, whereas Turkey has change into extra unequivocal in its assist for Azerbaijan.
Covid-19, in the meantime, is working its in poor health results on progress, public funds and confidence. Azerbaijan has recorded round 38,000 circumstances, 600 deaths and two lockdowns—the second lasting into August and accompanied by the closing of borders till September 30. The pandemic has meant a double whammy by the extra monies wanted for well being care and the affect on costs for Baku’s foremost income earners, oil and fuel, which had already been affected by the value struggle between Saudi Arabia and Russia. An as-yet uncalculated affect can also be anticipated on Azerbaijan’s overseas change earnings, that are being depleted because the authorities proceed to assist the manat at 1.7 to the US greenback. “In contrast to different power producers within the area, Azerbaijan hasn’t allowed the autumn in oil costs and earnings to be mirrored within the greenback change price,” says Paul Gamble, head of Rising Europe Sovereigns at Fitch Scores. “The authorities appear dedicated to the unofficial peg.”
GDP is anticipated to contract this 12 months, the European Financial institution for Reconstruction and Improvement (EBRD) forecasting a 3% decline whereas Fitch Scores anticipates minus 4.2%. Neither could be a lot worse than the 2014-2016 downturn, when Baku needed to twice devalue the manat resulting from a pointy drop in oil costs. One issue is a pointy rise in fuel manufacturing and earnings—13% in 2019, with one other 5% projected for this 12 months—which has fed into the broader economic system.
“Azerbaijan is definitely extra resilient now,” says Dimitar Bogov, the EBRD’s native economist for Azerbaijan. “The imbalances aren’t so extreme and monetary administration is extra prudent.”
Lingering considerations hover over the banking sector, which noticed 4 of the 15 largest establishments—Atabank, AGBank, NBCBank and Amrakh Financial institution—taken below the wing of the Central Financial institution of the Republic on April 27. Financial institution capital necessities have needed to be eased amid ongoing liquidity considerations, and deposit ensures prolonged as nonperforming loans (NPLs) are at present estimated at 11%. Nonetheless, the bigger banks are actually on firmer footing, notably IBA, which defaulted in Could 2017; the federal government took over its unhealthy belongings and accomplished a restructuring in 2018.
Worries are rising over how a lot the authorities might need to spend to defend the manat, nevertheless. Coupled with considerations over the affect of low oil costs and the nation’s excessive dependence on the power sector—representing some 95% of export earnings and 75% of presidency income—this led Fitch to put a adverse watch onto Azerbaijan’s sovereign BB+ ranking in April.
“A Sound Disaster Response”
The overall view appears to be that Aliyev’s authorities has issues below management for now, thanks partly to the small function that providers and retail play within the home economic system. And whereas Baku has adopted a extra conservative fiscal response than some governments—equal to round 3% of GDP—the emphasis on lockdowns and border closures to convey the virus below management seems to be working.
“The authorities have enforce a sound disaster response, serving to corporations and people impacted by the disaster,” says Bogov, who expects a return to GDP progress subsequent 12 months, forecasting 3%. “Yr on 12 months, we anticipate disposable revenue to stay flat, which isn’t unhealthy contemplating the challenges being confronted.”
Azerbaijan’s secret weapon—one it has turned to at different occasions of acute disaster—is its sovereign wealth fund, Sofaz, which held some $43.2 billion of belongings as of mid-July. This has acted as a buffer, conserving this 12 months’s anticipated fiscal deficit of 12.4%—in comparison with a surplus of 9.1% in 2019—from rising extra quickly. Drawdowns from Sofaz are enabling Baku to finance each the deficit and the manat peg, regardless of the anticipated fall in oil earnings.
Later this 12 months, the federal government is anticipated to unveil full particulars of its 2030 Imaginative and prescient alongside a revitalized plan to draw new capital, together with overseas direct funding. Nonetheless, with oil costs round $37 per barrel—effectively beneath earlier expectations of $55 and more likely to stay low given the long-term falloff in demand and progress of sustainable power—it’s clear that Baku should pace up financial diversification.
The federal government is already pushing forward with a program to develop the petrochemical trade off the again of oil and fuel.Azerbaijan ranks 34 out 190 international locations within the 2020 World Financial institution Doing Enterprise survey, and the authorities are intent on facilitating non-oil non-public sector exercise. Areas focused for progress embrace agriculture and agribusiness, commerce and logistics and IT/telecoms as Azerbaijan goals to take fuller benefit of its Eurasian location. Infrastructure improvement is one other potential progress space, with Chinese language funding enjoying a rising function.
Prospects for Privatization
Privatization, traditionally one thing of a no-no in Azerbaijan’s top-down system, can also be within the playing cards as soon as the Covid disaster subsides. In early August. Aliyev, a former head of nationwide oil firm Socar, criticized it and different large state-owned monopolies—together with Azerbaijan Airways, Azerbaijan Railways and electrical energy supplier AzerEnergy—for inefficiencies and for drawing cash from the state finances moderately than utilizing their very own monies. He has steered the entities be privatized, though no timetable has been set.
How possible are phrases to show to motion? Gubad Ibadoglu, economist at Rutgers College, has predicted that Socar might face chapter by 2023 if critical restructuring doesn’t occur. Baku seems to be watching the instance of equally energy-rich Kazakhstan, which launched the Astana Worldwide Monetary Company (AIFC) 5 12 months in the past and began privatization in late 2018.
Shut observers advise warning, nevertheless, noting that Azerbaijan’s energy-based economic system isn’t a straightforward setting during which to undertake main adjustments, and that enhancements don’t require privatization. Additionally, Baku doesn’t have an equal to the AIFC to allow asset gross sales.
“Earlier than privatization, corporations would want to make structural adjustments to enhance administration, operational practices and company governance,” says Fitch’s Gamble. “This could enhance their efficiency and make them extra enticing to personal traders. Reform is clearly on the agenda, however when it comes to privatization, it’s early days, and this isn’t a straightforward economic system to reform.”
Others agree. “The primary obstacles to privatization embrace the shortage of a fiscal want to take action—fiscal financial savings are almost 100% of GDP—difficulties find an impartial purchaser, power safety considerations and doable lack of assist from the corporate administration,” says Dmitry Dolgin, senior analyst at ING.
Dolgin means that as Azerbaijan strikes into 2021, the main target will probably be on extra instant challenges, most urgently grappling with the pandemic and its penalties. “Different priorities embrace tackling the continued dependence on oil,” he says, “working throughout the restricted room for macro maneuver as a result of fastened change price regime, and the tensions with Armenia.”