Economic downturn in Azerbaijan? Rumors and realities
Analysis by Caliber.Az

ANALYTICS  15 February 2023 - 18:40

The beginning of 2023 in Azerbaijan was marked by a slight decrease in indicators in industrial production, mainly associated with a reduction in oil production and a change in the external price environment. At the same time, in the economy's non-oil sector, on the contrary, 2 per cent growth was noted. In any case, it would be a mistake to make economic forecasts for the year based on the indicators of only the first month. Nevertheless, some experts in their publications on social networks make far-reaching conclusions, predicting an economic downturn in the republic. Caliber.Az analysed how justified such conclusions are.

As international experience shows, statistics on the indicators of the beginning of the year, as a rule, cannot serve as a true guide in determining the dynamics of any processes. In January, most market entities, including government agencies, are just preparing for the allocation of financing, determining the amount of funding and the necessary working capital, studying investment prospects, etc. Therefore, it is in the first month of the year that a conservative scenario is often observed in terms of production volumes in the industrial sector, and only by the end of the first quarter of the industries gradually reach the level of output, according to which it is already possible to draw fairly stable conclusions about annual indicators. This universal phenomenon, observed in most countries of the world, is equally typical for the economy of Azerbaijan.

As for the statistics on the basis of which forecasts are made, then not everything is clear here either. According to the State Statistics Committee, the nominal GDP of Azerbaijan in January of this year slightly exceeded 9,690 billion manats, having decreased by 1.5 per cent in real terms. However, this did not happen due to any serious internal problems, systemic industry crises, market imbalances, etc. On the contrary, the volume of production of industrial and other products in the non-oil sector of the economy increased by 2 per cent. Moreover, in some industries, a tangible, often multiple rise was recorded. For example, the production of leather, leather goods, and footwear, as well as woodworking, increased by 2.9 times, machinery and equipment increased by 80.3per cent, printing products increased by 75.6per cent, paper and cardboard increased by 44.9per cent, computers, and electronic and optical products increased by 44.6per cent, electrical equipment increased by 30.9per cent, clothing increased by 25.4per cent, beverages increased by 24.1per cent, construction materials increased by 20.7per cent, and textile industry increased by 17.5per cent. It is quite obvious that the increase in production in all these industries is most directly caused by market demand, in the absence of which there could be no question of any rise in indicators. And this, in turn, indicates the stability of factors that stimulate internal and external development. For example, a large construction site in the Karabakh region, stimulated by multibillion-dollar injections from the budget, has been supporting the demand for the services of construction companies and the building materials industry for more than two years, the growth of orders from pipe-rolling plants, manufacturers of cables and electrical equipment, freight transport, special equipment, etc. At the same time, the dynamic intensification of industrial production and the pipe rolling in the post-pandemic period has been supporting the demand for electronic and optical products, computers, etc. for two years.

Finally, over the past two years, Azerbaijan has seen an unprecedented increase in exports of non-oil products: by the end of 2022, its volumes reached $2.992 billion, which is 10.3per cent higher than in the previous statistical period. Moreover, this is not caused by temporary fluctuations in the market, but by a stable long-term trend. As you know, the global industrial cooperation, and logistics of supplies of raw materials and components, which were created for decades, were significantly shaken by the coronavirus pandemic, and as a result of the military conflict between Russia and Ukraine, this negative process only worsened, repeatedly increasing commodity prices and intensifying the food and energy crises. However, against this difficult background, a window of opportunity opened for Azerbaijani producers of non-oil products to enter foreign markets, which increased our country's exports to Europe and to the markets of developed countries on other continents. These positive trends can be traced in the first months of this year: in January, domestic non-oil exports increased by 22.6 per cent, amounting to $284.53 million.

Apparently, both of these factors – stable domestic demand and stable supplies to foreign markets will accompany local producers not only in 2023 but also in subsequent years. This is also recognised by experts in the financial structures of the European Union, the World and Asian Banks, as well as most of the world's leading international rating agencies.

As for the decline in nominal industrial production in Azerbaijan, which decreased by 4.3per cent in January and amounted to 6.5 billion manats [$3.8 billion], these processes are almost entirely related to a 4.9per cent reduction in production in the extractive oil industry. In particular, according to the Energy Ministry, in January 2023, oil production with condensate in the country amounted to 2.7 million tons (a decline of 6.9per cent), and exports – 2.1 million tons (a decline of 8.7per cent).

However, the drop in oil production has been observed in the country for several years, and this objective process is associated with a decrease in the flow rate on the Azeri-Chirag-Guneshli (ACG) platforms and wells of a number of other fields. However, in 2022, the State Oil Company (SOCAR) was able to overcome the industry downturn, intensify production and diversify domestic reserves during the year, thereby increasing oil exports by 2.6per cent and supplying over 18,053 million [tons of] oil to the foreign market. So making annual forecasts for one month is a thankless task, especially since SOCAR does not always export oil in equal shares: supplies may increase or decrease during the year, depending on market conditions. As a result, the final revenues from oil exports can grow even in the event of a reduction in the volume of its supplies: similar trends were observed in 2021-2022, when, as a result of high demand and prices, oil revenues significantly exceeded the indicators of previous years. As for natural gas, last year there was a 6.5per cent increase in its production and exports steadily increased, and this trend can be traced back to the beginning of 2023. So, this January, Azerbaijan increased gas exports by 12per cent to 2.2 billion cubic meters, and the supply of gas to Europe was brought to 1 billion cubic meters with an increase of 25per cent.

Against this background, the predictions of some Facebook experts who claim that the domestic economy will dive into the negative zone this year are at least greatly exaggerated. As noted, the non-oil sector of the economy is developing steadily, and the increase in average salaries, pensions and social benefits contributes to the growth of consumption, thereby increasing trade turnover, and stimulating the growth of the production of food and other consumer goods at local enterprises. Accordingly, tax deductions to the treasury will also increase. There is no particular reason to fear a global decline in oil and gas prices (as has been observed recently in European markets) - according to new estimates by leading experts, forecasts for the expected global recession in the United States, the EU and China are greatly exaggerated. On the contrary, some recovery in the production sector is expected during the year, and in Southeast Asia and Indochina, this growth will be several times higher than in Western countries.

In particular, analysts of reputable rating agencies, companies and banks - Fitch, JPMorgan, Bank of America, Goldman Sachs assume the price per barrel of Brent this year in the range of $80 to $110, which is more than acceptable for Azerbaijan, where oil revenues of the state budget for 2023 are calculated from an average price of $50 per barrel. Thus, the expected dynamics of prices for hydrocarbon raw materials will significantly outstrip the cut-off price, contributing to the growth of oil and gas revenues of the State Oil Fund (SOFAZ) in the current and, probably, in subsequent years. In particular, experts of the International Monetary Fund (IMF) predict an increase in SOFAZ assets by 82.3per cent in 2022-2028 - up to $82.076 billion. And in a recent report by the Asian Development Bank (ADB), the growth of the CBA's foreign exchange reserves by the end of 2023 is estimated at $10.2 billion. It is obvious that without consistently high prices for oil and gas raw materials, calculations by the IMF and ADB on the growth of our country's foreign exchange reserves would simply not be possible.

Accordingly, experts from the IMF and the World Bank, as well as the European Bank for Reconstruction and Development (EBRD) foresee that stable energy prices will support Azerbaijan's economic growth in the near future, and in 2023 the GDP level will be at least 2.5per cent. A similar opinion is shared by the Government of the republic, where they believe that the positive dynamics of the development of the non-oil sector and the demand for energy raw materials in the next four years will help our country maintain sustainable economic growth. In particular, in 2023, the Azerbaijani government estimates GDP growth at 2.7per cent, and this parameter should increase markedly in 2024 - 4.1per cent, maintaining moderate growth in 2025-2026 - 3.7 and 3.4 per cent, respectively.

Caliber.Az