Fitch Solutions names directions for increasing investments in Azerbaijan in 2023

The outlook for investment into Azerbaijan has improved considerably and Fitch forecasts that the component’s real growth contribution will increase to 1.3 percentage points (pp) in 2023 from an estimated 0.9pp in 2022 (0.8pp averaged in 2011-21), Report informs, citing Fitch Solutions.

According to data from the Azerbaijani central bank, capital investment rose by 8.2% y-o-y on an annualized basis in the first eleven months of 2022; this follows full-year contractions of 8.2% y-o-y in 2021 and 7.5% y-o-y in 2020.

“Indeed, the capital investment growth has corresponded with the strong recovery in the non-oil and gas sector which has accelerated from 7.2% growth in 2021 as a whole to 9.1% on an annualized basis as of November 2022. The non-oil and gas sector have benefitted from shifting Russian trade away from Europe and more towards the East amid heavy EU sanctions against Russia (exempt in Azerbaijan) due to its invasion of Ukraine. Trade between Azerbaijan and Russia has reportedly risen by 23% (annualized) as of November 2022 and it now accounts for 12% of Azerbaijani trade compared to around 8% in 2021. We expect these flows to remain strong in 2023 and as such capital investment in the non-oil and gas sector will continue to grow,” reads the report.

Another source of investment will likely emerge from countries in the EU and elsewhere that are looking to boost their energy trade with Azerbaijan as an alternative source to Russia, according to the report.

In July 2022, Baku and the EU signed a memorandum of understanding to expand the EU’s consumption of Azerbaijani gas via the so-called Southern Gas Corridor from around 11.0 bcm per year (as of 2022) to 20.0bcm by 2027. This was followed by another important announcement in December 2022 that construction of an undersea cable in the Black Sea supplying the bloc with Azerbaijani generated electricity will begin in 2023. The project is due to come online by 2029.

“Notably, Azerbaijan has warned that in order to supply the EU with more energy, the country will need funding, given that a lot of its infrastructure is running at close to full capacity. Interestingly, while the two sides agreed that Azerbaijan would be raising its supply from 8.1bcm in 2021 to 12.0bcm in 2022, Baku reported in December that it had provided 11.3bcm in 2022 and would be raising this to 11.6 bcm in 2023,” says Fitch Solutions.