Macroeconomic stability - core for attracting foreign direct investment to Azerbaijan In the wake of the FDI Standouts Watchlist report

The key objective of Azerbaijan's economic reforms in recent years has been to create a favourable business climate for attracting foreign direct investment (FDI) to the domestic non-oil sector.

Increased capitalisation of the economy by foreign portfolio investors usually involves the inflow of modern technologies and efficient management methods into the country's business ecosystem, as well as the strengthening of its position in the international division of labour. According to the data of the annual research of the international structure of FDI Standouts Watchlist published last week, Azerbaijan entered the top 10, ranking seventh in the world in terms of the potential to attract FDI in 2024. The rating positions of our country are mainly based on the stability of its macroeconomic indicators.

In the post-industrial era, the basic condition for the successful and sustainable growth of every developing country's economy is its ability to attract capital, advanced technology and corporate governance expertise into its economic system. Attracting foreign direct investment, especially in the format of portfolio capitalisation of the economy, seems to be the best option for solving these problems. In this case, the FDI recipient country, along with impressive financing, gets access to advanced technologies, including modern equipment and technologies in the form of patents, licences and know-how.

The foreign investor also introduces improved management technologies, including sales management, optimal schemes for exporting products. The positive effects of FDI include the upgrading of the skills of local specialists, which is also financed by foreign investors. Nevertheless, the performance of developing countries in attracting FDI is determined primarily by the stability of their macroeconomic performance, including monetary stability, optimal external debt-to-GDP ratios, and the availability of fiscal preferences and a favourable business climate for investors. 

The stability of macroeconomic parameters, the surplus balance of payments and trade, and the high level of gold and foreign exchange reserves have contributed to the growth of Azerbaijan's investment attractiveness at the global level for many years, which was confirmed in the reports of international rating and donor organizations. So, over the past decade and a half of Azerbaijan in terms of improving the business environment, and promotion opportunities to attract investment has twice held the leading position in the Doing Business 2009 report and Doing Business 2019, and in the Doing Business report 2020, was named one of the 20 most reformist countries. Investment attractiveness factors have been preserved even in a very difficult post-pandemic period: according to the report of the Eurasian Development Bank, in 2022 Azerbaijan ranked fourth among the CIS countries in attracting FDI.

Even though the past year was not the best for attracting foreign capital (over three quarters FDI in the domestic economy decreased by 4.5 per cent, totalling about $4.372 billion), the situation will improve in the coming years and Azerbaijan can count on investment growth. 

This, in particular, is evidenced by the data of the annual FDI Standouts Watchlist research published the previous day, according to which Azerbaijan ranked seventh in the world's top 10 states in terms of the potential to attract FDI in 2024 in priority areas. The leader of the list - Cambodia - will maintain the pace of the highest investment indicators in 2024, while in general, the top 10 includes six Asian states, including neighbouring Kazakhstan, which took the sixth position in the ranking.

According to the FDI Standouts Watchlist, the country's robust macroeconomic performance has played a key role in making Azerbaijan one of the world's leading FDI destinations. Overall, FDI experts assess the macroeconomic performance and FDI trajectories of the world's top 50 investment destinations, using data from the International Monetary Fund (IMF) and the FT's cross-border investment monitor, fDi Markets. This comprehensive analysis aims to identify countries entering the new year 2024 with strong macroeconomic performance and high FDI growth potential.

It is worth recalling here that the IMF forecasts real gross domestic product (GDP) growth of 3.5% per year for 2025-2028, while next year it may reach 3.6%. According to the IMF forecasts, such factors as slowing inflation, relatively high oil and gas prices, the stable exchange rate of the national currency, and an improving situation in the banking sector play in Azerbaijan's favour. The main thing is that next year the country's economy will maintain a favourable macroeconomic environment, balance of payments surplus, and inflation is forecasted at 5-5.5% according to the Central Bank of Azerbaijan (CBA), i.e. close to the targets for next year (4±2%).

According to the CBA, the country has a very impressive financial "safety buffer": for example, in the first 11 months of last year, the country's strategic foreign exchange reserves (assets of the Central Bank, Goneftefond and treasury funds of Mifin) grew by 16.6% to $68.2bn. These reserves can preserve the stability of the country's financial system in case of global force majeure for several years, while simultaneously serving as a guarantee of the state's debt obligations.

Today, the country's foreign currency reserves are more than six times the size of its external debt, and this allows Azerbaijan to manage its debt sustainably, maintain a high creditor status, and, most importantly, to attract new funds from international donors without special risks. Moreover, Azerbaijan's external debt has been consistently decreasing over the past years: by the end of 2023 it was less than 10 per cent of GDP, and this year it is planned to reduce this figure to 7 per cent of gross domestic product.

In other words, all of the above indicates the stability of basic macroeconomic indicators and a relatively low level of risks for potential investors willing to invest in the economy of our country.

Alongside, Azerbaijan is taking consistent steps to improve the business climate: fiscal and customs legislation and administrative rules are consistently liberalised, the Competition Code (CC) has recently been adopted, also aimed at encouraging investment activity by strengthening the fight against monopolisation of certain areas of the economy, suppression of unfair competition, etc.

There are fifty agro-parks and about two dozen industrial zones and neighbourhoods in the country, and an industrial and logistics Alyat FEZ has been established: residents of these clusters are given extensive tax and utility preferences, and these structures play a key role in attracting FDI into the domestic non-oil sector.

The most important step to improve the attractiveness of the investment environment in the country should be the imminent adoption of the Foreign Direct Investment (FDI) Promotion Strategy: the document is being developed by specialists from the Ministry of Economy and the Azerbaijan Export and Investment Promotion Agency (AZPROMO) and aims to implement international best practices in this area. The long-term goals of the strategy include improving the investment climate and increasing the efficiency and return on investment by modernising investment mechanisms and instruments.

Moreover, it is necessary to increase the share of portfolio investors (including transnational corporations) for attracting FDI mainly in the real sector of the economy, including the active use of public-private partnerships in the process of increasing the capitalisation of the domestic economy. The strategy's objectives include the creation of favourable and competitive conditions for FDI with a focus on the implementation of effective high-tech export-oriented projects with a high level of added value.

In parallel with the development of the strategy to stimulate FDI, a strategy to encourage foreign direct investment for 2020-2025 was developed with the participation of specialists from the International Finance Corporation (IFC). The document identifies such areas as alternative energy, logistics, transport, chemical industry, food processing and agriculture, light industry and IT-technology as priority areas for attracting international investors.