Country Report Azerbaijan April 2009

Outlook for 2009-10

• Having been re-elected in October 2008, the president, Ilham Aliyev, is likely to face a more testing second term in office, given the much weaker external economic environment, and, in particular, sharply lower oil prices.
• There will be an intensification of competition between the EU and Russia for Azerbaijani energy resources.
• Slower real GDP and money supply growth, and falling commodity prices, will contribute to disinflation in 2009. Weaker domestic demand will help to slow the rate of price rises to an average annual rate of around 7% in 2009-10.
• The manat is forecast to depreciate in nominal terms against the US dollar in 2009-10. In 2009 higher inflation than in the economies of Azerbaijan's main trade partners will result in the manat strengthening in real effective terms.
• Real GDP growth is expected to slow to just 2.5% in 2009 as oil prices plummet, before picking up modestly in 2010, to 4.5%. The downside risks to this forecast are considerable, given the economy's reliance on oil.
• The current-account surplus is expected to contract from an estimated US$16.9bn in 2008 to US$1.2bn in 2009, owing to the collapse in oil prices. It should pick up to around US$4.8bn in 2010 as oil prices recover slightly.

Monthly review

• A nationwide referendum on constitutional change, held on March 18th, has resulted in the lifting of the two-term limit on the presidency, paving the way for MrAliyev to remain in office indefinitely.
• The Economist Intelligence Unit's democracy index for 2008 ranks Azerbaijan 135th out of 167 countries. A low score for the category assessing the functioning of government reflects the concentration of power in the presidency.
• To boost liquidity, the National Bank of Azerbaijan (NBA, the central bank) has cut the refinancing rate from 5% to 3%, and the reserve requirement for commercial banks from 3% to 0.5%.
• According to the governor of the NBA, the central bank is spending at least US$150m each month to stabilise the exchange rate of the local currency, the manat. The risk of a devaluation has grown, now that the referendum is over.
• Strong expansion in parts of the non-oil sector, including construction, prevented Azerbaijan from posting negative output growth in January-February 2009. Mining output contracted by 2.6% year on year in this period.
• The State Oil Company of the Azerbaijan Republic (SOCAR) and Russia's Gazprom have signed a memorandum of understanding (MoU) that paves the way for talks about the sale of Azerbaijani gas to Russia from 2010.

Source: Country Report