Low oil prices are not a reason to panic in Azerbaijan

Low oil prices are not a reason to panic in Azerbaijan

Deutsche Welle

The price of oil is falling almost every day, reaching record low levels in recent years: less than $46 for a barrel of Brent and WTI on January 14. And this is probably not the limit, if one compares the prices with the peak of the crisis of 2008-2009, and believes the forecasts of analysts. For many oil-producing countries today it is the number one problem. But there is a country among the post-Soviet oil-producing states where, although the daily reports from the oil markets are not regarded with joy, at the same time people there are not panicking. This country is Azerbaijan.

Why the manat, not the ruble?

This is especially evident in how different currencies reacted to the drop in oil prices. The Russian ruble has lost 40 percent of its value in 2014 against the dollar and continues to fall, accelerating inflation. And what about the Azerbaijani manat? Its value has actually been maintained, even grown in relation to the euro, the executive director and board member of the German-Azerbaijani Chamber of Commerce Florian Schroeder pointed out. "So far, Azerbaijan has invested a lot of money in the reduction of dollar supply. The effect of this measure and the cut in oil prices has had approximately zero result. The manat is already worth more than the euro. The strong manat is a problem for the export economy," he noted. However, Schroeder does not see specific reasons for a fall in the rate: "If a devaluation  happens, in my opinion it will be smooth."

The Azerbaijani situation is very different from the Russian one, where one of the main reasons was the depreciation of the ruble, outflow of capital and maintenance of foreign investors analyzes Schroeder: "In Azerbaijan there is nothing like that."

An almost rosy picture

Baku today demonstrates a high-growth economy. This is not the 20 percent jump in the mid-2000s, but a GDP growth forecast for 2015 of 4.3 percent, according to the World Bank. The peculiarity of the Azerbaijani economy is that, compared with the Russian one, it is not so integrated into the global economy and therefore better protected against external shocks, explained Schroeder.

In addition, the drop in oil prices caught Azerbaijan in the midst of preparing for new large-scale projects, which no one is going to switch off. This is why the German companies see no crisis in Azerbaijan, says Tobias Baumann, the Head of the Eastern Europe section of the Federal Association of Chambers of Commerce in Germany (DIHK). "Perhaps the fact that many projects have been funded and implemented, such as preparation for the European Games, which will be held in June 2015 under the auspices of the European Olympic Committee in Baku, where a stadium, hotels and other facilities are being built," he says.

Economic growth is under threat

However, if oil prices do not rapidly return to the previous level, Baku cannot do without additional measures, experts believe. After all, the country's budget has been drawn up with an average oil price of $90 per barrel. The Central Bank of Azerbaijan in autumn 2014 also built its forecast for 2015 on the assumption that oil prices will return to the level of $90, as noted in a research note of the Azerbaijani Center for Economic and Social Development (CESD). But is there any reason to believe that an overabundance of oil on world markets will disappear, and the quotes will again begin to grow rapidly?

Against the background of reducing foreign exchange earnings, the general reserves of the Central Bank of Azerbaijan, including foreign exchange, are constantly shrinking, CESD analysts say, citing data from the bank. In this case, Azerbaijan, unlike the OPEC countries or Russia, responded in another way to the sharp decline in oil prices. Baku agreed to reduce production and sales of crude oil in the second half of 2014.

CESD analysts calculated three main scenarios for the Azerbaijani economy in 2015, depending on the dynamics of oil prices, according to which its loss can range from 3 to 5 percent of the country’s GDP, which could lead to a reduction in state incomes from 10 to 15 percent.

So it is obvious that Baku cannot avoid a revision of the parameters of the state budget. "The Azerbaijani government will have to revise its budget for the current year. The income sources create obvious problems, but they do not seem to me insoluble for politicians in Baku," says Baumann.

"And ten years under the present conditions"

Considering that a price of $90 per barrel of oil does not seem achievable in the near future, what is the price of oil that would suit the Azerbaijani authorities? This will largely depend on the planned expenditure, say German experts. The budget recorded so-called protected expenditure - on defense and on the social sphere, which hardly anyone would cut, suppose analysts from the CESD. According to them, most likely it will be necessary to save on infrastructure projects. "What distinguishes the situation in Azerbaijan from Russia is the relatively low level of social spending. The fact is that many sections of the population live in poverty - pensions are small, wages in the public sector are considered low. But because of this the Azerbaijani authorities can cope more easily with the lack of income," says Tobias Baumann.

But even in the most pessimistic scenario, Azerbaijan cannot worry too much about its macroeconomic stability. "This is one of the countries with the lowest debt per capita. There are reserves in the Oil Fund (SOFAZ), and the Central Bank. I interpret the figures that are available so that the country can, if we take the basis of current conditions at a price of 50 dollars per barrel, survive for 10 years," Florian Schroeder summed up.