Defying all expectations, Azerbaijan’s GDP increased 4.2% y/y in 8M15. According to official figures, non-oil GDP expanded 7.3% y/y, while oil GDP contracted 0.1% y/y. However, our estimates of monthly growth figures indicate a slowdown in July and a probable contraction in August, pointing to a lagged impact of low oil prices and the associated devaluation on the real economy. The delayed impact will continue to weigh on the economy in 2016 and this expectation is taken into consideration in the official draft budget document for 2016. According to the document, growth is estimated to fall from the current 4.2% in 8M15 to 3.3% for the whole of 2015 and further down to 1.8% in 2016. In our view, given the prospects of oil price, official forecasts are broadly realistic.
Slower growth for the rest of the year
Growth in 8M15 was mainly driven by construction, trade, and manufacturing. The construction sector, bolstered by last year’s investments related to the European Games, experienced 8.4% y/y growth in 8M15, down from double digit growth rates in 1H15. Relatively suppressed inflation helped boost trade in 8M15, which expanded 11.3% y/y. However, as price pressures gain steam, activity in the trade sector is likely to decelerate in the rest of the year. Activity in the manufacturing sector was another major source of growth, particularly in food processing and refinery. Food processing probably benefitted from devaluation, which made imports more expensive, resulting in increased demand for domestic products. Low base was a key factor explaining the growth in refining, but the effect has already been exhausted and growth fell to below 2% in 8M15. Agriculture and tourism, expanding 7.4% and 16.7% y/y, respectively, in 8M15 were other sectors supporting growth, but given their small shares in GDP, their contributions were limited.
Nominal GDP in US$ terms expected to decrease 24.6% in 2015
Nominal GDP has fallen 7.9% y/y in 8M15 in AZN terms and 27.5% y/y in US$ terms, as the February devaluation resulted in average US$/AZN rate going up from 0.78 in 8M14 to 0.99 in 8M15. According to the draft budget document, nominal annual GDP in AZN terms is expected to fall from AZN 59.0bn in 2014 to AZN 57.2bn in 2015, with a minor increase to AZN 57.7bn in 2016. In US$ terms, the decline is more pronounced, falling from US$ 75.2bn in 2014 to US$ 56.7bn in 2015 (a 24.6% decline) and further to US$ 55.0bn in 2016.
2Q15 external balance surplus at the lowest level
High oil prices have been feeding the strong current account surplus of the previous years, which stood at strong double digit levels. As prices plunged, so did Azerbaijan’s oil revenues, which accounted for 94.2% of total exports in 2014. As a result, the surplus has shrunk from US$ 6.4bn in 1H14 (17.6% of GDP) to less than US$ 0.1bn in 1H15 (0.2% of GDP). The external sector was further pressured by strong capital outflows, particularly in 1Q15. Capital outflows (defined as deposits and cash under the assets category of balance of payment statistics) peaked in 1Q15 at US$ 3.7bn, before falling to less than US$ 1bn in 2Q15. The ensuing deficit was financed by outflows from the reserves (as defined in the balance of payments statistics), which amounted to US$ 1.2bn in 4Q14, surging to US$ 4.6bn in 1Q15, and then falling to US$ 1.7bn in 2Q15.
