Country Report Azerbaijan January 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 of office, given the much weaker external economic environment, and, in particular, sharply lower oil prices.
• Competition between the EU and Russia for Azerbaijan's energy resources, particularly its gas, will intensify.
• Weaker real GDP and money supply growth, as well as falling commodity prices, will contribute to disinflation in 2009. Tighter fiscal policy will help to slow the rate of price rises in both years of the forecast period.
• The manat is forecast to depreciate in nominal terms against the US dollar in 2009-10. Higher inflation than in the economies of Azerbaijan's main trading 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 fall from an estimated US$15bn in 2008 to just US$1bn in 2009, owing to the collapse in oil prices. It should pick up again to around US$8.7bn in 2010 as oil prices recover modestly.

Monthly review

• Energy negotiations have taken centre stage over the past month, with MrAliyev visiting Italy and Turkmenistan to discuss Azerbaijan's role as a potential supplier of gas to Europe.
• Diplomats involved in the peace talks between Armenia and Azerbaijan over Nagorny Karabakh have urged the two sides to take steps in the next few months to enable them to start to draft a comprehensive peace agreement.
• The authorities have approved a 2009 state budget that is based on an oil price assumption of US$70/barrel, which is optimistic compared with the Economist Intelligence Unit's forecast for an average price of US$35/b.
• The National Bank of Azerbaijan (NBA, the central bank) has cut the refinancing rate by a further 2 percentage points, to 8%, and has reduced commercial banks' reserve requirements from 9% to 6% to improve liquidity.
• Sectors such as metals and construction are now showing signs of strain. Weak activity in the real estate sector is contributing to a slump in output of ferrous metals.
• Falling global commodity prices are driving a deceleration in Azerbaijan's consumer price inflation. In November 2008 the year-on-year rate dropped to 18.2%, the first time that it has been below 20% since March.

Source: Country Report