Fitch Solutions upgrades economic growth forecast for Azerbaijan

Fitch Solutions has revised up its growth forecast for Azerbaijan from 3.4% to 5.1% to reflect the economy’s strength on the back of strong oil prices.

Report informs, citing the company, that the economy had grown by 7.2% on a year-to-date basis which is the strongest rate recorded in the past five years.

"We attribute the strong performance in the Azeri economy largely owing to the rise in global oil prices (see chart below)," the company said.

According to it, Azerbaijan is also relatively less exposed to the Russian economy compared to other markets in the South Caucuses as the country now predominantly trades with the European Union and Turkiye.

Moreover, remittances inflows that primarily come from Russia, only accounts for 3.0% of GDP in Azerbaijan compared to neighbouring Armenia’s 10.0% of GDP.

"That said, given that the economic outlook for the European continent is darkening, we expect Azeri growth to also come under pressure in the second half of 2022 and early 2023. As such, we continue to expect the Azeri economy to slow to 3.5% in 2023," Fitch Solutions said.

"Despite a generally strong picture for Azerbaijan, we expect private consumption to weaken from an estimated 7.0% in 2021 to 4.5% in 2022. Generally speaking consumer spending will be supported by still positive real wage growth (see chart below), however, as price pressures continue to rise, we note that real wage growth has also been weakening. Like most countries in continental Europe, Azerbaijan too has been buffeted by high food prices owing to supply cut-offs in Ukraine due to the Russian invasion. In May consumer price inflation rose by 12.6% year-on-year which is the fastest rate recorded since 2016; prices of food products, however, rose by 17.9%. Soaring prices will become demand destructive if inflation starts outpacing nominal wage growth; as of April, nominal wage growth was at 14.2% y-o-y which was indeed stronger than 13.4% in March," says the report.

Meanwhile, Fitch Solutions forecasts capital formation to accelerate slightly in 2022 to 3.8% from an estimated contraction of 6.4% in 2021.

"It is worth noting that according to the monthly capital investment index produced by the central bank, Azerbaijan saw a year-to-date contraction of 3.2%. However, the index has been showing small improvements in that the rate of contraction has slowed since the start of 2022. The measure closely matches the performance of Azerbaijan’s non-oil and gas sector which has recorded robust growth of 11.0% year-to-date as of May and stronger than 7.2% recorded in 2021 as a whole," it said.

Fitch Solutions said it pencilled in a small, 1.1% full-year growth for government consumption in 2022 from 6.0% in 2021. According to it, at present, Azerbaijan's economy does not need fiscal stimulus to support growth and the government itself has a patchy record of coordinating fiscal policy with positive movements in oil prices.

"In July the government approved a slight upward adjustment to budgetary spending on social protection, but this will still lead the country to record a fiscal surplus given the revenues it receives from oil sales. Our Oil and Gas team expects oil prices to average USD105.0/bbl in 2022, which is 48.0% higher than prices in 2021," the company believes.

"Looking ahead, we expect this trend to carry on with a forecast of 10.8% for annual export growth and 8.0% for import growth. Trade more generally will be tempered in the second half of 2022 given rising growth risks to Azerbaijan’s key trading markets," the report reads.

"Risks to our outlook is weighted to the downside. Our growth view is contingent upon the assumption that the global economy will not enter into a recession in 2022. However, in the event of a recession, demand for Azeri oil will fall thereby pushing down other aspects of the economy," the company said.