Country Report Azerbaijan May 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, and falling commodity prices, will contribute to disinflation in 2009. Weaker domestic demand growth will help to slow the inflation rate to an annual average of around 7% in 2009-10.
• The Economist Intelligence Unit expects the authorities to have to allow the manat to depreciate in nominal terms against the US dollar in 2009-10, 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$1.4bn 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

• Azerbaijan has warned that the normalisation of relations between Turkey and Armenia before Armenia withdraws its troops from Azerbaijani territory would contradict Azerbaijani national interests.
• Tense relations with Turkey, combined with slow progress on the Nabucco pipeline, appear to have pushed Azerbaijan to consider much more actively Russia's offer to buy all of its gas.
• The authorities have been forced to acknowledge that revenue earned by the oil sector will be much lower in 2009 than previously expected, and that the oil fund might not receive any revenue in 2009.
• Restricted access to global capital markets and falling deposits have forced banks to scale back their lending. Total credit amounted to Manat6.7bn (US$8.3bn) at end-February 2009, down from Manat7.2bn a month earlier.
• Rising unemployment indicates that the economy is starting to suffer under the impact of the global economic and financial crisis. A total of 6,000 jobs were reportedly lost in the first quarter of 2009.
• High oil prices in January-September 2008 ensured extremely strong growth in the current-account surplus, which ended the year at US$16.5bn, equivalent to 40% of GDP, up from US$9bn (30.7% of GDP) in 2007.

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