With a 5.3% y/y growth rate (7.0% in non-oil GDP), Azerbaijan performed better in 1Q15 than had been expected from an oil-dependent country that had just devalued its currency by more than 33%. Our analysis indicates that this growth rate was fed mainly by one‑off factors: inaugurations of major sport complexes for the European Games in March, the lower oil production base of the previous year, and an immediate post-devaluation run on shops/markets by those seeking to benefit from ‘sticky’ prices. However, these factors will probably subside in the coming quarters, and March’s consumption boom will probably mean less consumption in the following months. With reserves falling and the banking sector being ‘stress-tested’ by post-devaluation developments, we do not expect similar growth rates in the coming quarters. Moreover, the lack of credible forward-looking assurances regarding future monetary policy, particularly exchange-rate policy, is acting as a brake on the new investment needed to drive growth.
One-off factors result in stronger-than-expected growth in 1Q15
Azerbaijan’s economy grew 5.3% y/y in 1Q15 despite the 33.8% devaluation in late February. YTD data indicate that growth actually accelerated in March 2015, taking the figure from 4.2% y/y in 2M15 (i.e. Jan-Feb) to 5.3% y/y in 1Q15. Non-oil GDP increased 7.0% y/y in 1Q15 from 5.1% y/y in 2M15. The inauguration of several sport complexes for the first European Games in March pushed construction-sector growth from 8.3% y/y in 2M15 to 13.2% y/y in 1Q15, and trade accelerated from 8.5% y/y in 2M15 to 9.6% y/y in 1Q15, probably due to people rushing to do post-devaluation shopping as prices remained relatively unchanged. Additionally, oil output increased versus the low base of the previous year, resulting in 3.4% y/y growth in mining and quarrying. These three sectors together accounted for 66.4% of the total 5.3% GDP growth in 1Q15. Contrary to the real growth rate, nominal GDP in US$ terms contracted 23.4% from US$ 17.0bn in 1Q14 to US$ 13.0bn.
Reserves decline by US$ 8.4bn
While GDP growth rates have not been significantly affected yet, reserves have been hit hard by oil prices falling from US$ 113.2/bbl in June 2014 to US$ 49.5 in January 2015. Despite the recent recovery to above US$ 65/bbl, central bank reserves continued to decline, falling 44.8% to US$ 8.4bn at the end of April 2015 from US$ 15.2bn in July 2014. The 33.8% devaluation on February 23, 2015 did not reverse the trend, with the Central Bank losing US$ 1.5bn in March and US$ 1.1bn in April 2015. After 8 months of decline, reserves increased marginally by 0.5% m/m in May 2015. Falling oil prices also affected State Oil Fund reserves, which had been declining since reaching a record high of US$ 37.6bn in 2Q14. SOFAZ reserves then declined by US$ 2.7bn (US$ 2.2bn of which was in 1Q15) to US$34.9bn in 1Q15. As a result, consolidated reserves fell by US$ 8.4bn from US$ 52.8bn in 2Q14 to US$ 44.4bn in 1Q15.
