Country Report Azerbaijan June 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.
• 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.
• Slower real GDP and money supply growth, along with falling commodity prices, will contribute to disinflation in 2009, before base-period effects push consumer prices upwards again in 2010.
• The Economist Intelligence Unit expects the authorities to have to allow the manat to depreciate in nominal terms against the US dollar from the second half of 2009, owing to the likely sharp drop in foreign-exchange inflows.
• The current-account surplus is expected to contract from US$16.5bn in 2008 to US$3.5bn in 2009, owing to the collapse in oil prices. It should pick up to around US$5.8bn in 2010 as oil prices recover slightly.

Monthly review

• Azerbaijan, along with Turkey, Georgia and Egypt, has signed a declaration with the EU on the establishment of a so-called southern corridor for gas supplies to Europe.
• Following talks between Mr Aliyev and his Armenian counterpart, Serzh Sarkisian, in May, Azerbaijan has refuted international mediators' relatively upbeat assessment of the Nagorny Karabakh peace process.
• The authorities have cut the refinancing rate by 1 percentage point, to 2%, and announced their intention to increase spending on social welfare, amid evidence that output in Azerbaijan's non-oil industrial sector is contracting.
• Despite official measures to improve liquidity, commercial bank lending dropped by 13% between end-2008 and end-March 2009. Deposits fell by 29% over this period.
• Real GDP grew by 4.3% year on year in January-April 2009, a sharp slowdown compared with growth of 15% in the year-earlier period. Output in the manufacturing sector fell by 6.9% year on year in the first four months of 2009.
• The construction sector appears to be bucking the trend of decline, with output expanding by 22% year on year in January-April 2009, probably partly because of a doubling of public investment.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60;39
NAICS Code: 52;31