April 13, 2016
Azerbaijan, a central Asia's country heavily dependent on oil exports, has been hit by the recent drop in commodity prices. Low export prices coupled with a weak external environment have put pressure on the manat, resulting in a two-step devaluation in 2015.
In our latest macroeconomic forecast, we expect inflation to accelerate above 20 % this year, as a weak currency fuels a rise in import prices. Later, tighter monetary policy and muted domestic demand will ease inflationary pressures.
In our view, the recent nominal exchange rate adjustment was large enough to restore stability to the balance of payments temporarily. However, we also believe that the country's competitiveness will continue to worsen due to weak fundamentals, low external demand, accelerating inflation, and a decreased appetite of foreign investors to invest in hydrocarbon production. As a result, we forecast a gradual depreciation in the manat over the forecast horizon.
Low oil prices, restrained fiscal spending, and increasing uncertainty will keep domestic demand low, and GDP will fall by about 3 % this year. Growth will stagnate in the long term due to weak fundamentals and a slow rebound of the oil price.
The risks to the forecast are high and mostly on the negative side. Any delays in credible fiscal and monetary consolidation will result in depletion of international reserves and an increase in dollarization, accompanied by sustained exchange rate pressure and higher inflation.
This forecast risk assessment is in line with the reading registered on our Macro Risk "thermometer", a tool available to our clients.
As we reported already in January, our risk “thermometer” had kept pointing at the risk of a potential further exchange rate adjustment and/or the necessity of an additional realignment of macroeconomic policies.
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Jiri Lukac, senior economist at OGResearch
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