Azerbaijan's economy: Risks and balance of payments Analyzing the key indicators

The negative trends that have accumulated by September may once again lead to a period of weak global GDP growth, as indicated by the recent sharp drop in oil prices. The persistence of current scenarios over a prolonged period would not bode well for Azerbaijan's economy, which still relies significantly on global demand for energy resources.

Nevertheless, the country’s core macroeconomic indicators remain relatively stable. According to estimates from the Central Bank of Azerbaijan (CBA), shared during a recent media briefing, the national oil sector posted a surplus in the current account balance during the first half of the year.

The high volatility of global hydrocarbon prices, coupled with a decrease in oil production and exports (only partially offset by increased gas production and supply) in 2023, resulted in a decline in Azerbaijan's foreign trade surplus. The past year, marked by a global recession and imported inflation, saw a slowdown in industrial activity worldwide. This drop in demand and raw material prices affected not only Azerbaijan’s oil sector but also impacted its non-oil industries. Azerbaijan’s foreign trade surplus last year amounted to just over $16.613 billion, which is 29.6% lower than in 2022, a year characterized by an unprecedented rise in energy market prices. In any case, these factors became one of the key challenges for the national economy and, by the end of last year, led to a drop in the country's GDP to 1.1%.

Despite the high volatility in oil prices this spring, the overall global oil price situation remained relatively favorable for Azerbaijan. At the same time, in the first half of 2024, the country increased its natural gas exports to Europe by 12%, delivering 6.4 billion cubic meters of gas to European consumers. Furthermore, this year saw relatively higher GDP growth rates. According to the State Statistics Committee of Azerbaijan, the country's GDP reached 70.544 billion manats from January to July 2024, which is a 4.5% increase compared to the same period last year. Notably, the non-oil sector's added value grew by 6.7%, with industry emerging as the key driver of GDP growth, accounting for 38.4% of the total.

Nevertheless, according to recently published data from the State Customs Committee (SCC), Azerbaijan's foreign trade turnover decreased by 11.3% in January-July 2024 compared to the same period last year. Whether this gap will widen or narrow in the coming months largely depends on the level of demand in global energy markets. Unfortunately, by early September, the oil market saw a sustained "bearish" trend, and on the eve of this, the price for November futures of Brent crude fell to $71.06, wiping out all of the gains made in 2024. The price of Azerbaijan's Azeri Light crude also dropped, reaching $73.53 on September 12.

Global analysts offer conflicting predictions about the duration of the current decline in oil prices. Among the main reasons cited for the drop in demand are the anticipated recovery of oil production in Libya, which holds Africa's largest reserves, a noticeable de-escalation in the Middle East, and OPEC+ plans to increase production by an additional 180,000 barrels per day in October this year. Other factors contributing to the decline in oil demand include the decrease in China's monthly business activity index and reduced industrial output in the US, where the Purchasing Managers' Index (PMI) has remained below 50 for five consecutive months. In this context, experts at Saxo Bank and Goldman Sachs believe the current oil price downturn will likely persist until the end of the year. Meanwhile, specialists at Bank of America suggest that investors should continue to invest in commodities, including oil, while Fitch Ratings projects that average prices for Brent crude will hold at around $80 per barrel in 2024.

The outlook for the global energy market remains uncertain, but the Central Bank of Azerbaijan sees no immediate cause for concern. "To maintain Azerbaijan's balance of payments, the price of one barrel of Azeri Light crude on the global market should range between $40 and $45," said Samir Nasirov, Director of the Statistics Department at the Central Bank of Azerbaijan (CBA), during a recent media briefing. "At the moment, there is no reason to worry about oil prices."

Indeed, the current "bearish" trend in the oil market may be short-lived and might not significantly impact the annual average figures for the commodity market. However, it’s important to note that if the price decline extends for a longer period, certain risks could arise regarding the revenue side of the state budget. This year, Azerbaijan's state budget is based on an oil price of $75 per barrel, and any drop in demand and prices for liquid hydrocarbons below this threshold would primarily affect the revenues of the State Oil Fund of Azerbaijan (SOFAZ), reducing the potential for accumulating foreign exchange reserves.

The challenges of the current situation were highlighted by Samir Nasirov: "The surplus in the oil and gas sector's current account for the first half of the year reached $6.948 billion, down 15.4%, while the deficit in the non-oil sector amounted to $4.322 billion, an increase of 41.1%."

It's important to clarify that the balance of payments refers to the movement of financial flows between countries, representing the relationship between the amounts paid by a country abroad and the funds received from abroad over a specific period. A balance of payments is considered active (surplus) when the inflow of funds exceeds outflows, and passive (deficit) when outflows exceed inflows.

The balance of payments includes the current account, which comprises the trade balance (the difference between exports and imports of goods) and the balance of current "invisible" operations, which includes net exports of services, investment income, and remittances. Another key component is the capital account, which reflects the inflow and outflow of capital to and from the country.

How does Azerbaijan fare in other segments of the balance of payments? A key indicator here is foreign direct investment (FDI) in the Azerbaijani economy. As noted by Samir Nasirov, in the first half of this year, investments amounted to $2.978 billion, a year-on-year decrease of only 0.04%. This means that Azerbaijan has maintained a certain balance in FDI dynamics, and it’s possible that by the end of the year, this slight lag will be offset. For reference, FDI inflows into Azerbaijan in 2023 amounted to $6.658 billion, reflecting a 6.1% year-on-year increase.

Additionally, according to the CBA’s Director of the Statistics Department, state entities, enterprises, and organizations in Azerbaijan earned $491 million in the securities market during the first half of the year, a 49% increase compared to the same period last year. "Overall, the portfolio investments of Azerbaijan's institutions, enterprises, and organizations totaled $610 million. These entities are investing surplus funds into both domestic and foreign securities, providing additional revenue streams for the country in the future," Nasirov emphasized.

During the reporting period, management bodies, enterprises, and organizations allocated $1,3 billion towards repaying external debt obligations, leading to a reduction in the country's total liabilities by $2.1 billion. This dynamic reduction in debt burden is a positive indicator, reflecting the stability and manageability of the country's financial and monetary system overall.

Additionally, it's important to note that Azerbaijan's substantial foreign currency reserves play a crucial role in safeguarding the country's monetary market against external shocks. Strategic foreign exchange reserves in Azerbaijan reached nearly $70 billion by the end of the first half of the year, having increased by 1.8%. This financial buffer is vital for maintaining macroeconomic stability in the country.