BAKU — Azerbaijan’s economy will take a serious hit from decline in global oil prices and the coronavirus pandemic, but economists and officials say reforms undertaken since a financial crisis in 2014 will help to mitigate the impact.
Worldwide demand for fuel has dropped by 30 percent due to the coronavirus pandemic and last week President Ilham Aliyev said Azerbaijan, an OPEC member where oil and gas sector make up 45% of the economy, should “work and live as if we live in the post-oil era.”
As of Tuesday Azerbaijan had reported 641 cases of the coronavirus, and seven deaths. The authorities have imposed a nationwide lockdown and restricted domestic travel. Some state employees and those in oil industry enterprises are still going to work.
Plummeting global oil prices six years ago sent the former Soviet energy producer’s economy into decline, led to bankruptcies among its commercial banks and pushed the manat currency down by a third against the dollar.
But changes undertaken since should help the country weather the current difficulties.
“After the crisis (in 2014), the economy was growing at a moderate pace, the exchange rate in real terms barely changed and authorities embarked on improving the business environment and diversifying to non-oil sectors,” Ivana Duarte, the European Bank’s for Reconstruction and Development (EBRD) mission head in Azerbaijan, told Reuters.
“In addition, the combined foreign exchange reserves of the central bank and SOFAZ (state oil fund) are almost matching the size of GDP and can sustain the market pressure for some time,” she said.
SOFAZ, which manages the country’s proceeds from oil contracts, oil and gas sales, transit fees and other revenue, has already sold around $2.5 billion on the market in the first quarter this year, up from $1.55 billion in January-March 2019, to support the manat currency and has the right to sell another $4 billion till the end of the year.
The US dollar/manat exchange rate has been stable at 1.7 in recent weeks, supported by government FX interventions.
The Fund said in an e-mailed answers to Reuters questions that it had been selling oil at an average price of $59 per barrel in the first quarter and added there was no need “for any untimely and forced sale of assets included in the investment portfolio.”
Azerbaijan based its current state budget on an average oil price of $55 per barrel. Brent was trading at around $33 a barrel on Tuesday.
Last week Aliyev ordered the provision of around 2.5 billion manats ($1.2 billion) or 3% of the gross domestic product (GDP) to support the economy as the pandemic spreads.
The government and central bank officials have said it is too early to make predictions about the impact. The government had projected 3% growth this year.
Last week the Asian Development Bank cut its growth forecast for Azerbaijan to 0.5% in 2020 from its previous projection of 2.4%, but said the growth would rebound to 1.5% next year.
Bankers say that new regulations for commercial banks, including underwriting and forex lending standards, has reduced the risk of a new devaluation or bankruptcies among commercial banks.
“Banking sector is currently less sensitive to FX volatilities compare to 2015 and … economy is more stable to short-medium term oil price shocks,” Anar Hasanov, the head of Access Bank, told Reuters.
“Non-oil economy has increased significantly and domestic production covers big portion of internal demand for strategic products.” (Writing by Margarita Antidze; Editing by Raissa Kasolowsky)
