FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
BAKU INTERBANK CURRENCY EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Azerbaijan’s growing oil wealth has enabled Mr
Aliyev to increase expenditure on wages and
infrastructure. The president has also used the
oil windfall to maintain the patronage network
that rewards loyal members of the political elite
for their support. Under the constitution, he is
ineligible to stand for a third term, and will in
theory have to stand down in 2013. The issue
of succession is likely to guide Mr Aliyev’s
policies throughout his second term.
In the wake of the conflict between Georgia
and Russia in August, Azerbaijan will find it
more difficult to balance its foreign policy
orientation in the coming years. The authorities
have so far taken a careful diplomatic
approach, seeking stronger security and
energy ties with the West, while maintaining
military and economic ties with Russia.
However, Azerbaijan’s authorities are now likely
to come under greater pressure from the West
to sign up to new energy projects, and from
Russia to reject such initiatives in favor of
closer energy ties between Azerbaijan and
Russia. Russia’s decision to recognize the
independence of Georgia’s breakaway regions
of South Ossetia and Abkhazia has caused
concern in Azerbaijan, owing to the implications
that this has for its own separatist region of
Nagorny Karabakh, which, together with
surrounding territory, is held by ethnic
Armenian forces.
The nascent commercial banking sector will
find it more difficult to raise capital abroad, and
this will reduce access to credit for domestic
companies and households, thereby
dampening growth in the non-oil economy.
Fiscal policy will be tighter than in recent years,
partly to combat inflation, but also because
weaker economic growth and lower oil prices
will dampen revenue growth. Monetary policy
will remain constrained by a lack of effective
instruments. Notwithstanding Azerbaijan’s
progress up the World Bank’s ease of doing
business index, the operating environment for
many companies will remain difficult, owing to
pervasive corruption, and the presence of
formal and informal monopolies in many
sectors.
Economic Performance
Rising oil and gas output, and increasing
export volumes, will continue to drive real GDP
growth in 2009-10. However, base-period
effects and a weaker global environment will
take their toll, and growth is now expected to
slow to an annual average rate of 7.6%, down
from an estimated 13.1% in 2008. Development
of the hydrocarbons industry will nevertheless
continue to generate positive spillover effects
for sectors such as telecommunications,
transport and construction. The rehabilitation of
infrastructure will also boost overall growth. On
the expenditure side, domestic demand growth
will be led by government spending and
investment. These developments will boost
import volumes, as a result of which the
contribution of the foreign balance to growth
will decline from 2009.
Given the country’s reliance on oil exports, the
fighting between Georgia and Russia, which
came shortly after an explosion on the Baku-
Tbilisi-Ceyhan (BTC) pipeline in early August,
dampened growth sharply in that month. Any
resumption of the conflict could have a longer-
term impact on Azerbaijan, reflecting its
dependence on Georgia as a trade route. In
addition, weakening global growth could
prompt a sharper slump in oil prices than the
Economist Intelligence Unit currently forecasts,
although the likely accompanying deceleration
in inflation would be welcome. In the longer
term, concerns remain over the non-oil sector,
which is at risk from inflation and a
strengthening real effective exchange rate. A
loss of competitiveness for sectors such as
agri-processing could jeopardize economic
diversification.
Average annual consumer price inflation is
estimated at 21.6% in 2008, and is forecast to
remain in double digits in 2009-10, although
disinflation should bring the year-on- year rate
down to single digits by the end of 2010. The
manat depreciated slightly in August and
September 2008, probably owing to the
disruptions to oil exports resulting from the
conflict in Georgia, and the political risks
associated with the heightened tension in the
region. However, by late September the
currency had again resumed an appreciating
trend. Foreign-currency inflows from oil exports
will continue to strengthen the manat in nominal
terms against the US dollar. An 80% rise in oil
export volumes between 2007 and 2010,
combined with high, albeit falling, global oil
prices, will ensure that the current account runs
surpluses equivalent to around 30% of GDP.
Growth in spending on imports of capital
goods will slow slightly, as large hydrocarbons
projects near completion, although
refurbishment of infrastructure will require
imports of machinery and equipment. An
appreciating currency and rising real wages will
boost expenditure on imported consumer
goods. Services debits for the oil and gas
sector, on activities such as consultancy and
geological services will remain large, and the
increased payment of dividends by foreign
investors in the hydrocarbons sector will keep
the income deficit high in 2009-10.
Nevertheless, the large trade surplus will
continue to dwarf the deficit on the invisibles
balance.*
* The Economic Intelligence Unit-October 2008
Key Information Contacts
National Bank www.nba.az
State Committee for Securities www.scs.gov.az
Ministry of Finance www.maliyye.gov.az
National Depository Center www.mdm.az
Ministry of Economic Development www.economy.gov.az
State Statistical Committee of Azerbaijan www.azstat.org
2004-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%)
Industry
Agriculture
2006-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Services
Public consumption
Private consumption
Gross fixed investment
Net exports of goods & services
40
32.3
35
35.9
31.7
30
55.4
26.4
25
20
15
12.3
10
5
0
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