AZERBAIJAN SHIFTS POST-ELECTION FOCUS TO ECONOMY
Zawya , Middle East
Nov 15 2013
Azerbaijan’s president Ilham Aliyev may have won the elections in
October for a third time, but he could not secure what he most prized
– legitimacy.
International observers from the Organisation for Security and
Cooperation in Europe (OSCE) noted the elections were undermined by
limitations on fundamental freedoms, lack of level playing field and
“significant problems on election day.”
“A high number of observers assessed the situation in polling stations
on election day as negative, with significant problems coming in
the opening, voting and counting procedures,” the watchdog said in
a statement. “They reported clear indications of ballot box stuffing
in 37 polling stations, and the counting was assessed negatively in
an unprecedented 58% of the stations observed.”
Even the US, which is an Azerbaijani ally, said that the elections
“fell short of international standards.”
Nevertheless, the president secured 85% of the votes with his
challenger Jamil Hasanli securing a mere 7%.
With the formality of elections out of the way, the president is now
redirecting his energies back on the economy, which appears to have
stumbled lately.
The International Monetary Fund expects Azerbaijan’s GDP growth
will recover to 5.6% in 2014, compared to 3.5% this year, as the
pre-election fiscal and monetary stimulus continues to ripple across
the economy and natural oil and gas revenues improve.
After growing at an annual average rate of nearly 16% from 2000-07,
the Azeri economy began slowing down considerably and eked out minor
gains over the past three years.
OIL-DRIVEN ECONOMY
The growth had been entirely driven by oil and gas extraction industry,
and higher commodity prices in the early years.
“The rise in oil-related revenue has enabled the government to
generate fiscal surpluses and to significantly invest in the country’s
infrastructure, thereby transmitting the positive effects from the
oil sector to the broader economy,” said Moody’s ratings agency in
an October report. “As a result, Azerbaijan’s poverty levels have
dropped significantly, limiting the likelihood of domestic political
and social unrest.”
But crude oil production has faltered in recent years. Azerbaijan’s
oil supply declined 40,000 barrels per day (bpd) this year to average
around 850,000 bpd. The Azeri-Chirag-Gunashli (ACG) offshore field
saw production decline by nearly 50,000 bpd this year. ACG accounts
for 78% of Azerbaijan oil output.
The troubles at the oilfield may be a harbinger of more pain to come
as oil production is expected to decline over the next two decades,
according to the International Energy Agency.
Indeed, the vulnerabilities of oil and gas-dependent wealth is
apparent, as Azerbaijan’s fiscal breakeven oil price stands at around
USD 90 per barrel, which makes it vulnerable to the commodity’s
price volatility.
Current account surpluses are also falling from a high of 35.5%
of GDP in 2008 to an estimated 9.2% in 2014.
But as crude production declines, the country’s natural gas production
is expected to rise at an annual average growth rate of 4.5% over
the next two decades to reach 47 billion cubic meters (bcm), from
its current level of 16 bcm, the IEA estimates.
Much of it will be driven by Shah Deniz field which is expected to
supply Azeri natural gas to European markets. Once the pipeline is
built, around 2020, some 10 bcm per year of gas is set to flow to
southern Europe with the possibility of later capacity expansion to
20 bcm.
BEYOND HYDROCARBONS
Fitch Ratings believes government spending will drive growth of 10%
in the non-oil economy in 2013, but provide less impetus in 2014
and 2015. Growth prospects outside the oil sector are also hampered
by a poor business climate, although the government is piloting
improvements, the ratings agency noted.
“The non-oil sector, supported by public spending and a credit boom,
has expanded at double-digit rates and is at risk of overheating,”
said the European Bank for Reconstruction and Development in its
latest report on global economic prospects, noting that inflation is
expected to soar to 6.3% next year from 3.7% this year.
But the country’s State Oil Fund of the Republic of Azerbaijan (SOFAZ)
and the Central Bank of Azerbaijan have sizeable foreign funds to the
tune of USD 45 billion (or 66% of GDP) to ensure that the government
can withstand external or internal shocks.
ARMENIAN CONFLICT
Apart from the risk of falling commodity prices, Azerbaijan’s dispute
with Armenia remains a cause for concern over Armenian occupation of
Azerbaijan’s Nagorno-Karabakh territory.
“An immediate concern is military miscalculation, with implications
that could far exceed those of a localized post-Soviet frozen conflict,
as the South Caucasus, a region where big powers meet and compete,
is now also a major energy corridor,” said the International Crisis
Group in a recent report.
Clashes increasingly occur along the Azerbaijani-Armenian frontier far
from Nagorno-Karabakh, the conflict’s original focus. Tensions have
also spread to areas along the border with the Azerbaijani exclave
of Nakhchivan where Azerbaijani and Turkish exercised in July, the
ICG said.
“A subsequent firefight produced casualties, and Armenia staged its
own war games near the Azerbaijan border in September. Vigorous
international engagement is needed to lessen chances of violent
escalation during coming weeks and months.”
On November 6, the two sides have finally agreed to hold talks after
diplomatic efforts by the United States, Russia and France, but the
dispute remains a key flashpoint in the region.
“Moody’s says that constraints on the rating include the very low
institutional strength, limited credibility and effectiveness of
government policies, sustained geopolitical tensions with neighboring
Armenia over the disputed territory of Nagorno-Karabakh, as well as
rising risks from strong credit growth in the context of a generally
weak banking system.”
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