Azerbaijan’s economy expanded at its fastest pace in the last 4 years in 2013. Non-oil GDP grew 10%, driven by two key industries – construction and trade – and oil GDP recovered to positive growth territory after two negative years. Imports of goods and services increased 11% y/y, fuelled by private consumption and oil field maintenance needs. This, combined with lower exports on the back of flat oil volumes produced, resulted in a smaller current account surplus. Azerbaijan’s C/A surplus at 17% of GDP is still among the world’s leaders, and the strong external surplus continues to feed the country’s reserves. The State Oil Fund’s assets and the central bank’s reserves increased by US$ 1.7bn and US$ 2.5bn to US$ 36bn and US$ 14bn respectively. As a result, total reserves were up 2ppts y/y to 68% of GDP. The government’s expansionary fiscal policy will continue in 2014 and may result in the first budget deficit in 11 years, although this is dependent on the oil price. In order to prepare for the possibility of a budget shortfall, the government announced plans to scale back its investment program from 2015, meaning private investment will need to step in. Azerbaijan also took steps to ease its access to foreign financing by placing a US$ 1.25bn, 10-year debut Eurobond in March 2014.
Construction and trade drove Azerbaijan’s economic growth to 5.8% y/y in 2013, the strongest pace in the last 4 years. The two sectors accounted for half of the total economic expansion, delivering 23% and 10% growth rates, respectively. With the strong performance in these two sectors, non-oil GDP rose 10% y/y. The oil sector, on the other hand, reversed its downward trend of the previous two years and added 1% y/y in 2013 on a marginal increase in oil output, a 3.6% y/y increase in gas production, and a 6.2% y/y increase in refinery activity. Despite the pick-up, the 43.1mmt produced is still below the 2010 peak level of 50.7mmt. While oil production is unlikely to grow significantly, gas output offers real upside and will become the driving force of oil GDP growth in the coming years, in our view.
