Macroeconomic performance
Signs of economic recovery are emerging as the annual GDP growth for the first eight months of 2009 reached 5 per cent, an increase from 3.6 per cent during the first half of the year, reflecting a recovery in oil prices and an improved global economic outlook. Although this is a relatively strong growth performance regionally or even globally, it reflects a marked slow-down when compared with growth rates of over 20 per cent annually during the past three years. This slow-down mainly reflects sharply lower oil prices compared with a year ago. Industrial output, dominated by oil production that accounted for 60 per cent of GDP in 2008, grew by only 3.9 per cent in the first eight months of 2009. Inflation has slowed due to lower demand and the annual inflation rate was negative from May, reaching -0.4 per cent in August 2009 compared with 22 per cent at the end of 2008. Lower oil prices have also affected budgetary revenues. Tax revenues had fallen by about 20 per cent by the end of June 2009 compared with a year earlier, implying an annual increase in total budget revenue of little over 1 per cent during the same period. Despite some recent cuts, overall budget expenditures – in particular for infrastructure investments and social spending – have increased as part of the government’s crisis response, resulting in an estimated budget deficit of about 2 per cent of GDP in the first half of 2009.
Lower oil prices and weaker demand for hydrocarbons has also significantly affected exports, which had dropped by 77 per cent by the end of August 2009 compared with a year earlier. As imports dropped by only 15 per cent over the same period, the trade surplus narrowed by almost 78 per cent compared with the same period in 2008, although it still amounted to 7.8 per cent of GDP in August 2009.
Lower foreign exchange inflows following the large decline in exports outstripping the decline in imports has put pressure on the currency. The NBA has so far supported the currency and lost about 19 per cent of its foreign exchange reserves during the first three months of 2009. Consequently, the exchange rate has remained relatively stable and reserves have gradually increased again since March to US$ 4.8 billion in August although they remain about 22 per cent lower than at the end of 2008.
Outlook and risks
For 2009 moderate economic growth of around 3 per cent is expected, with a likely increase in 2010. Higher oil and gas production will underpin further investments in the sector. Notwithstanding the significant drop in hydrocarbon exports expected this year, the current account balance will remain in surplus. The NBA will focus its policy on ensuring adequate liquidity. Risks to the economic outlook continue to reflect Azerbaijan’s dependence on the hydrocarbon sector. Another sharp drop in oil prices would have significant knock-on effects, particularly on real estate prices. Lower collateral values and a worsening of the portfolio quality of banks could thus undermine the latter’s lending capacity, affecting growth prospects for the non-oil sector.
