EBRD predicts high energy prices to push up Azerbaijan’s economy

European Bank for Reconstruction and Development (EBRD) has issued the next "Regional Economic Prospects" (REP) report predicting the growth in Azerbaijan’s economy amidst surging energy prices.

The economies of Azerbaijan, Armenia and Georgia show some of the highest growth rates in recent years, Report informs, citing the EBRD report.

“Azerbaijan is benefiting from high levels of oil and gas revenues as a result of rising prices and higher export earnings, as well as the strong performance of its non-energy sector,” the report reads.

“Meanwhile, Armenia and Georgia are benefiting from an influx of Russian enterprises and information and communication technology (ICT) professionals, which is helping develop the service sector in these small countries,” the report notes.

However, the strong growth recorded in the region in 2022 will slow down in 2023, the EBRD noted, warning that the current growth in the Caucasus is mainly caused by temporary factors that can be easily reversed.

For Azerbaijan, the uncertainty is related to energy prices, as well as inflation. But for Georgia, the risks are driven by uncertainty and the high potential for external shocks. In the case of Armenia, it is further exacerbated by the country's close ties to the increasingly isolated Russian economy.

The report predicts that the growth of the Azerbaijani economy this year will be 4.5 per cent, and next year it will decrease to 2.5 per cent. At the same time, the Georgian economy will show 8 per cent growth with a slowdown to 5 per cent next year. Similarly, Armenia's expected growth of 8 per cent this year is likely to slow to 4 per cent in 2023.

During the first half of 2022, inflation in the Caucasus gained momentum due to a new wave of rising energy and food prices. The central banks of all three countries responded to this by raising interest rates.

Inflation has now fallen to an average of 10 per cent, which is still high but well below the average of 16.5 per cent across the EBRD's regions as a whole.

In Azerbaijan, the strong performance of the non-energy sector led to a growth of 6.2 per cent in the first seven months of 2022. Rising hydrocarbon prices nearly doubled export earnings, leading to large current accounts and budget surpluses.

High energy prices are expected to support economic growth in Azerbaijan in the near term. The May forecast for GDP growth of 4.5 per cent in 2022 and a slowdown to 2.5 per cent in 2023 remains unchanged.

In Georgia, robust growth of 10.3 per cent is being supported by a rise in tourism that is nearing pre-pandemic levels and an increase in remittances (bolstered by a temporary influx of Russian businesses and technology sector professionals).

These trends helped cover Georgia's trade deficit and contributed to the appreciation of the national currency lari, which led to an increase in foreign exchange reserves. Growth is expected to continue, albeit at a slower pace of 8 per cent in 2022, which remains well above the previously forecast growth of 3 per cent.

Next year, the report expects this trend to drop to 5 per cent, in line with the previous forecast.

In Armenia, the strong recovery seen in 2021 provided strong growth momentum in 2022, with economic growth reaching 13.1 per cent between January and July. As in Georgia, the arrival of many people and firms from Russia led to an increase in the influx of foreigners by 113 per cent and an increase in demand for services.

This helped Armenia finance its widening trade deficit. Foreign exchange reserves also increased by 20 per cent and the exchange rate by 18 per cent. The report projects strong growth of 8 per cent in 2022, up from a previous estimate of 4.5 per cent. The slowdown is expected to be less gradual, with a likely drop to 4 per cent in 2023. However, the latest growth estimate for 2023 still exceeds the earlier forecast of 2.5 per cent.

Overall, the EBRD forecasts production growth in its regions by 2.3 per cent in 2022. While this is a 1.2 percentage point increase from its May forecast, the bank is warning of lower growth in 2023, revising growth forecasts down 1.7 percentage points to 3 per cent.

The outlook is subject to further downside risks if the war in Ukraine escalates.

The EBRD also predicted that the economy of the East Asian and Caucasus regions, which includes Azerbaijan, will contract by 17.8 per cent this year and grow by 6.2 per cent next.