Focus: Economy

Here Today, Strong Tomorrow

Here Today, Strong Tomorrow

May. 1, 2013

Azerbaijan's non-oil sector has mobilized to keep the engines of growth running, as planned upgrades to oil and gas infrastructure come online.

The year started strong, with GDP expanding 2.8% in January 2013 compared to 0.8% the year before, according to Azstat. The non-oil economy grew by 8.8% over the month, while the production of crude was 3.8 million tons, down slightly by 3.1% from a year earlier.

Falling unemployment and inflation supported by foreign exchange stability—the manat (AZN) hovered at the $1.27 level in March 2013—were the year's success stories, with further improvements anticipated in 2013, a year in which the country will host a chapter of the Davos World Economic Forum. The country is currently ranked 46th in the World Economic Forum's Global Competitiveness Report.

INDICATORS

The effects of private and state investment in the country's non-oil sector were reflected in the GDP figures for 2012. The economy grew by 2.2% over the year, up from 0.1% growth in 2011—GDP totaled $55.87 billion at the end of 2011. This was despite relatively low oil and gas production figures, which are expected to pick up in 2013 as planned maintenance operations come to an end. Azstat posted a annualized GDP growth rate of 2.8% in January 2013, with the non-oil sector leading the charge with growth of 8.8% over the month—this is following expansion in the non-prime sector of 8% in 2012. The private sector's contribution to GDP has been a consistently expanding affair over the last decade, reaching 82.5% in 2011, according to Azstat figures, up from 71.8% in 2001. The country currently accounts for more than 80% of the South Caucasus economy.

Foreign investors have also taken note of the country, investing a total of $8.8 billion over 2012, while total investment was $22.1 billion. Investment has been driven by a slew of mega-projects in recent years, including the Baku-Tbilisi-Kars railway, the relocation of the Baku International Sea Port, and the launch of Azerspace-1, the country's first telecommunications satellite. According to data released by Azstat, 42% of foreign investment is accounted for by financial loans, whereas 39% is destined for the oil and gas sector.

State spending has also been on the rise, with the budget increasing to $25 billion in 2012, a vast increase from the $1.5 billion earmarked in 2003. Foreign exchange reserves continue to pile up, and currently are “in excess of $46 billion," said President Ilham Aliyev. Strategic reserves now account for 70% of GDP, having increased by 29 times since 2003. Azerbaijan also boasts a comparatively low public debt of 7%-8% of GDP, a stark contrast to public debt approaching 50% of GDP in neighboring Armenia.

Unemployment has also dropped to 5.1% and the poverty rate has fallen dramatically from 49% in 2003 to 6% in 2012. Inflation also continues to drop, and is expected to “hit a low single-digit rate of 5%-6%" in 2013, said Elman Rustamov, Governor of CBAR.

TRADE

In the first four months of 2012, Azerbaijan exported $8.4 billion worth of products. State-owned enterprises (SOEs), mainly through state oil and gas firm SOCAR, dominate the export arena, with the private sector accounting for only 4.48% of the total. Oil exports declined over 2012, a trend that looks to be continuing into 2013. According to data released by SOCAR, oil exports decreased by 15% to 1.67 million tons in January 2013 compared to 1.98 million tons the previous month. Despite a temporary drop in oil output, however, the country still runs a significant trade surplus. In 2011, this surplus reached $16.8 billion, according to data released by the State Customs Committee of the Republic of Azerbaijan. In 2010, the same figure was $14.76 billion.

In 2011, exports totaled $26.57 billion. The country's largest export partners over the year were Italy ($9.3 billion), France ($4 billion), CIS nations ($2.9 billion), and the US ($1.8 billion). Imports for the year were worth $9.75 billion. The CIS represented the highest share ($2.5 billion), followed by Turkey ($1.3 billion), Germany ($845 million), the US ($630 million), China ($628 million), France ($608 million), and Northern Ireland ($485.7 million).

Oil and gas accounted for 94.5% of the export basket in 2011, a figure that has steadily increased from 91.5% in 2001. However, the country's agriculture exports are also on the rise, with vegetable products accounting for 1% of the total in 2011 and prepared food and beverage products a further 1%. Metal and metal products were also worth 0.9% in 2011, up from 0.6% in 2010, as capacities expanded in a continuing upward trend in the sector, with aluminum production also resuming in 2012.

Over the same year, machinery, mechanical appliances, and electrical equipment represented the largest import bracket, at 31%. This was followed by vehicles and aircraft at 17.3%, metal and metal products at 13.7%, prepared food and beverages at 6.8%, chemical products at 6.4%, plastics at 3.7%, wood and wood products at 2.7%, mineral products at 2.4%, stone, cement, glass, and glass products at 2.2%, and wood pulp, paper, and paper products at 1.4%.

The trade surplus will likely widen over 2013 as oil exports pick up. In the medium term, the planned Trans-Anatolian Pipeline (TANAP) will likely improve the country's export potential. Expected to be completed by 2018 and cost up to $10 billion, the pipeline will link Europe to Azerbaijan through Turkey and export gas from the Shah Deniz-II gas field development. Trade with its neighbor Turkey reached $4 billion in 2012, with Azerbaijan importing $2.6 billion worth of products from the country in 2012. Chemical products represent Azerbaijan's largest import from Turkey, at $469 million, followed by electricity at $275 million, and wood products ($266 million).

GROWTH SECTORS

Several sectors have emerged as engines of non-oil growth in recent years as Azerbaijan seeks to leverage its considerable carbon wealth. Non-prime growth also receives some support from the State Oil Fund of the Republic of Azerbaijan (SOFAZ), an entity established in 1999 in order to stimulate the development of the non-oil sector and preserve macroeconomic stability through prudent domestic and international investment. In 2013, in cooperation with SOCAR, SOFAZ “will begin funding the TANAP project," said Executive Director Shahmar Movsumov. The fund is also looking to modify its investment strategy to “include several new asset classes" and start building “a diversified, multi-asset class portfolio," concluded Movsumov.

The development of the ICT sector has continued in parallel with efforts to improve the investment environment. The country is currently listed 67th on the World Bank's Doing Business 2013 report. Other growth sectors include agriculture, with food products and beverages increasingly present in the country's export basket. Large-scale transport infrastructure projects are also opening up the country to increased cargo transit, while the country's industrialists are also reporting record output, in growth driven by the private sector. Coming off the back of the Eurovision Song Contest held in Baku in 2012, tourist numbers also grew, helped along by the rapid expansion in tourism infrastructure. The number of foreign visitors grew by 10.7% over 2012.

ICT is the rising star of Azerbaijan's diversifying economy, contributing 1.9% of GDP in 2012—growth in the sector hit 18.2% and volume reached €1.5 billion. Early 2013 also marked the launch of Azerspace-1, the country's first telecommunications satellite.

It is agriculture, however, which is the most significant employer—37.9% of the population is engaged in agriculture, forestry, and fishing. AZN4.1 billion worth of agricultural goods were produced in the first nine months of 2012, up 6.3% on the same period in 2011. The sector received 3.4% of total investment in 2011, ahead of ICT with 2.4%. Another large recipient of investment was transport, which received 19.7% of total investment, or AZN2.5 billion in 2011, up from AZN2.44 billion in 2010. Increasing passenger and cargo quantities have underlined recent years.

This trend has seen the sector's contribution to GDP reach 6.6%, making it the third largest sector of the economy following oil and gas and construction. Major domestic projects will characterize the coming years and boost transit figures. Projects include the Baku-Tbilisi-Kars (BTK) railway, partially funded by SOFAZ, the relocation of the Baku International Sea Port, and the expansion of airports nationwide, including Baku's Heydar Aliyev International Airport. The transport sector employs 4.5% of the population, just behind manufacturing (6.2%).

The manufacturing sector represents 15% of total industrial output in the country, including oil and gas extraction. Significant gains have been made in areas such as petrochemicals, which now represent 7.4% of total manufacturing output. Other growth areas include the manufacture of automobiles, up 12.3% over the first 10 months of 2012. Record investment in manufacturing, which reached AZN847.9 million in 2011, up from AZN120.2 million in 2010, will likely ensure continued growth in the private sector-driven segment as the non-oil sector makes up for reduced oil and gas output.

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