Azerbaijan’s economy contracted by 3.5% y/y in 1Q16, sending the country into a technical recession. Economic activity fell due to a 5.7% y/y decline in the non-oil sectors, with construction being the main drag. While the dip has likely now passed, as the contraction slowed compared to 4Q15, the vague prospects for the rest of the year and the need to keep fiscal policy conservative are likely to constrain growth. We believe that the currently conservative fiscal stance and stable monetary policy are necessary and reduce the chance of another devaluation. Challenges remain, with reforms introduced in 2015 having failed to yield tangible results so far, thus hindering private sector investment. Bank loans fell despite FX liquidity increasing; this was one of the likely embodiments of the ’wait and see’ approach being adopted by businesses. As a result, banks are beefing up their foreign assets rather than financing domestic growth. We believe that this issue can be addressed by speeding up reforms that yield tangible results and prioritizing policies to attract foreign financial entities to Azerbaijan, thus increasing financing and improving competitiveness.
