Recent economic data for 5M14 point to a slowdown in Azerbaijan’s economy due to a decline in oil extraction and weaker oil processing activity after a major refinery embarked on maintenance works in January. The economy as a whole expanded 2.8% y/y in 5M14, down from 4.5% y/y in 5M13, as strong growth in non-oil GDP was undermined by a contraction in oil GDP. However, the refinery repairs are nearing conclusion and we expect oil extraction to recover slightly in 2H14. We therefore view the current drop in oil-GDP as temporary and believe stabilization in oil production is waiting in the wings.
GDP growth remains subdued
Falling oil production and refining activity continued to drag the economy in 5M14, as GDP growth slowed to 2.8% y/y from 4.5% y/y in 5M13. Oil-related GDP (45% of total GDP) shrank 3.6% y/y as oil output decreased 2.1% y/y and refinery output fell 15.5% y/y. A 3.4% y/y increase in gas production was not enough to offset the lower oil extraction. In total, oil and gas extraction contracted 1.8% y/y. Maintenance works at a major refinery in Azerbaijan, which began in January, are the drivers of the decreased refining activity. Production is expected to resume in 2H14 once repair works are completed.
Other components of GDP
Lower chemical and base metals production was another factor driving the contraction in GDP through manufacturing output. Food processing, which accounts for over 1/3 of manufacturing, increased 2.1% in the 5M period, but it was not enough to bring manufacturing into the green. Construction activity surged 17.3% y/y in 5M14 and accounted for 64% of total growth in the period. Trade came second in terms of its contribution to GDP growth; its 8.8% y/y growth rate accounted for 24% of the total growth. Tourism and IT services also grew at strong double-digit rates, but their minimal share in the economy limited their contribution to overall growth.
