Falling oil prices will have a negative impact on Azerbaijan in 2015. High public expenditure, which was not a pressing problem while oil prices were high, will be putting a strain on the fiscal balance. Our calculations indicate that with approved budgeted expenditure and at US$ 60/bbl, Azerbaijan may face a fiscal deficit of US$ 9.5bn (14.2%) in 2015 of which US$ 6.0bn will be financed by tapping SOFAZ reserves. We acknowledge that at 48.8% of GDP, SOFAZ reserves act as a strong buffer against price fluctuations in the short term and the government has several policy tools to use if the price weakness persists in 2015. The policy tools include cutting capital expenditure (which stands at 44.4% of total) at the expense of economic growth or tapping further into SOFAZ reserves. However, persistently low prices may pose greater challenges and more durable policy changes might be needed to revitalize Azerbaijani economy.
Falling oil prices: a new challenge
As a resource-rich country, Azerbaijan is dependent on oil and gas production and prices. In 2013, oil and gas sector accounted for 94.4% (corresponding to 40.8% of GDP) of total exports, 72.0% (28.6% of GDP) of the consolidated budget revenues and 43.4% of GDP.
Despite production contracting since 2010 from 50.8mn tons to 43.5mn tons, a higher oil prices kept oil inflows buoyant in 2011-2013, thereby strengthening Azerbaijan’s current account balance (21.4% of GDP on average p.a.) and increasing SOFAZ reserves (standing at 48.8% of GDP in 2013). As a result, external financing needs seemed a distant concern.
However, the recent weakness in oil prices is starting to present a challenge similar to that in 2009 when oil prices fell by 36.3%.
The government has planned the 2015 budget at US$ 90/bbl while the price has now fallen to around US$ 60/bbl. Our estimates suggest that oil price drop to US$ 60/bbl, will translate into nominal GDP contracting by 9.9%, consolidated budget revenues falling by 24.0%, SOFAZ reserves declining by 16.3% and current account surplus dropping from an estimated 17.1% of GDP in 2014 to 3.2% of GDP in 2015. However, falling oil prices will push deflator into a negative territory and, contrary to nominal GDP, economy in real terms is expected to grow by 2.8-3.1% in 2015.
While Azerbaijan has capacity to deal with temporary oil price fluctuations, persistent low prices will require some policy initiatives. These might consist of cutting public capital spending or tapping international bond markets. Azerbaijan’s low public external debt to GDP ratio of 8.5% allows easy access to international capital markets.
