Azerbaijan: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
End of the oil boom
The era of two-digit growth is over for Azerbaijan. The extraction rate at the giant Azeri-Chirag-Guneshli oil field in the Caspian Sea has reached cruising speed: nearly a million barrels a day. And with that representing over 80% of the country's daily output, production can no longer grow as rapidly as it has in the past. The energy sector thus achieved only weak growth of about 2% in 2010 despite increased gas production. This trend is expected to continue in 2011 with hydrocarbon production increasing moderately and GDP growth depending on the generally stronger rate of expansion of the non-energy sector. The construction and services sectors will likely contribute significantly to economic growth. Government is also allowing a 15% increase in welfare spending in order to spur household consumption. And the rise in prices is expected to follow the same trend as GDP growth: inflation will continue to fall from its peak of 25% reached in summer 2008 down to about 5% on average in 2011.
Large public and external surpluses enabled by the oil wealth
The public sector will again run a large surplus in 2011 even with the government adopting a conservative $60 price-per-barrel hypothesis. The SOFAZ State oil fund will continue to be topped off notwithstanding the fact that its balance sheet has swelled in the past last three years with its assets soaring from $3 billion in 2007 to over $20 billion in 2010. The fund now represents 40% of GDP and thus exceeds the stock of public debt, limited to 15% of GDP. The solidity of public sector accounts enabled the government to support the banking system during the financial crisis and when massive deposit withdrawals began to hit the banks in 2009. Although the sector is stable now, it still suffers from a lack of transparency and a high proportion of non-performing loans. Large current account surpluses have moreover made it possible to limit external indebtedness in financing investment projects. Foreign debt has been cut by half since 2004 and will remain low in 2011 even with the government and the national oil company SOCAR intending to return to international capital markets.
A risky geopolitical environment
Russians and Europeans have been competing for access to the energy resources whereas Azerbaijani authorities make sure to keep their export options open. Besides the South Stream and Nabucco pipeline projects, Azerbaijan has been exploring the possibility of exporting natural gas via Georgia (Azerbaijan-Georgia-Romania link-up) and Turkey (Turkey-Greece-Italy link-up). The ongoing dispute with Armenia over Nagorno-Karabakh has, however, been particularly tense. Military budgets have been rising sharply and in 2010 skirmishes cost the lives of several soldiers on both sides. These clashes constitute the most serious cease-fire violations since the five-day war in Georgia in 2008, and the negotiation process seems to be deadlocked. The risk of war thus remains high.
Strengths
- Growth driven by oil and gas wealth
- Development of new energy transit routes as result of the interest of Russia and the European Union in Azerbaijani resources
Weaknesses
- Lack of economic diversification
- Business environment undermined by the persistence of governance problems and a high level of corruption
- Risk of conflict with Armenia