RECENT ECONOMIC DEVELOPMENTS
The Azerbaijani economy contracted by 1.3% (year-on-year) in the first half of 2017, driven by a decline in oil GDP (7.2%) as production volumes were cut in line with the OPEC agreement. On the upside, and despite continued banking sector distress, the non-oil economy expanded by 1.7% for the first time in over a year, supported by the strong performance of the agriculture and manufacturing sectors.
Annual inflation remained high at 13.9% in June 2017, driven mainly by the increase in administratively controlled tariffs for electricity, water, and gas, and in domestic food prices, reflecting higher demand in Russia for Azerbaijani food. Citing inflationary pressures, the Central Bank of Azerbaijan continued to tighten the monetary policy stance in the first half of 2017 by scaling up liquidity absorption operations.
The current account recorded a surplus of 4.4% of GDP in the first quarter of 2017, driven by exports and a continued import contraction. Non-oil exports increased by 11% amid rising external demand for agriculture products. The manat has appreciated by 4.4% against the U.S. dollar since end-2016, reflecting its stronger external position and increased liquidity absorption operations.
The troubled financial sector continues to exert a negative impact on the economy. Credit contracted by 15.6% in the first half of 2017, and the quality of assets continued to deteriorate. Per official statistics, the nonperforming loan ratio reached 13% in June 2017 compared to 9% at end-2016. Although manat deposits grew in the second quarter of 2017, the client deposits (corporate and household) shrank by 4.4% during the first seven months of 2017.
Fiscal policy was expansionary in the first half of 2017 on the back of public investment. Despite this, the consolidated fiscal balance (including balances of the Oil Fund, the social protection fund, and the Nakhchivan government) recorded
a surplus at 0.3% of GDP in the first half of 2017, as increased investment was more than offset by higher-than-expected revenue. The non-oil deficit was 22% of GDP for the first half of 2017.
Azerbaijan’s economy is projected to contract by 1.4% in 2017 despite the increase in oil prices. Oil production will remain muted, while the recovery of the non-oil economy is unlikely to offset this effect, given the modest planned budget and ongoing banking sector distress. Inflationary pressures are likely to persist, as the Government has increased gasoline prices and food prices are expected to rise by the end of 2017 due to seasonal factors.
The economy should expand from 2018 onward, supported by an acceleration of oil GDP as the Shah Deniz gas field-one of the largest gas fields in the world-begins production. Non-oil output will continue to grow at a slow pace due to limited credit growth and the weak business environment.
The Government revised the 2017 budget, increasing expenditure against improved revenue prospects. The bulk of the spending increase will be used to capitalize the Azerbaijan Deposit Insurance Fund with AZN 500 million. However, the implementation of some public investment programs may be delayed. The consolidated fiscal balance is projected to reach a surplus of 4.6% of GDP, whereas the non-oil deficit is expected to be 16% of GDP in 2017.
Despite increased social spending, recent developments and the slow recovery of the private sector are not conducive to poverty alleviation in the short term. A large number of households remain vulnerable to falling back into poverty. The reduction in public investment and consumption in 2016 may reduce household welfare through decreasing employment, especially for those employed in the construction sector.
Last Updated: Oct 12, 2017