THE ART OF DEVELOPMENT

Azerbaijan 2011 | ECONOMY | REVIEW: ECONOMY

Azerbaijan is pushing ahead with economic diversification plans to smooth out the effects of commodity price volatility, while regional and domestic mega projects look to put the country on the investment map.

Azerbaijan's economy has cooled down from the giddy days of 34.5% growth recorded in 2006, as the first oil revenues started to flow into the economy. GDP growth at constant prices maintained a strong trend in the years following, coming in at 25% in 2007, then slowing to a more controllable 10.8% in 2008, and 9.3% in 2009. As growth slowed in the oil sector, as much a cause of reduced investment flows as it was to the lower oil price recorded over 2009, the non-oil sector has been seen to pick up the slack, with growth in ICT services particularly notable. GDP in PPP terms came in at $91 billion in 2010—a growth rate of 3.7%—as a result of the cooling oil price.

Over the period of 2008-2009, several non-export sectors posted double-digit growth, spurred on by expansion in the construction, real estate, and banking sectors. It is on this base that the authorities in Azerbaijan wish to build. Between January and June 2011, GDP grew 0.9%—slower than the growth rate experienced over the same period in 2010. “Our main goal is to develop the non-oil sector and diversify the economy," commented President Ilham Aliyev, adding that “7.2% growth was achieved in non-oil economy in the first six months of [2011], with 6.2% growth reported in agriculture." Despite the drive, however, challenges remain in attracting more FDI to the country, with the 2010 total coming in at $3.35 billion. More importantly than simply attracting FDI, it is into what sectors that the FDI is flowing that is becoming of importance to the government.


In 2010 Azerbaijan's total imports came in at $6.5 billion, paling in comparison to its exports, which were posted at $21.31 billion, 85% of which were petroleum exports. While trade with Russia still remains high, it is declining in the overall mix as ties build with neighboring Turkey as well as European nations. In that regard, the proposed Nabucco pipeline represents a significant opportunity for Azerbaijan to export its natural gas resources to Europe, not only boosting revenues but also providing for Europe's energy security, something which is almost certain to foster closer economic ties between Azerbaijan and the European bloc.

Aside from spending on economic diversification, the record $20 billion budget that the country boasts after an amendment in 2011, as well as the strategic currency reserves of up to $38 billion, have allowed the government to increase its focus on solving social issues. According to the authorities, average incomes increased 17% over the first six months of 2011, while pensions increased 40%. A state rural development program has also seen the creation of 38,000 jobs so far in 2011. Unemployment currently stands at 0.9%, while the population considered below the poverty line was approximately 11% according to 2009 estimates. Inflation also continues its decline, reaching 5.1% in 2010, as the Central Bank of Azerbaijan looks to sterilize the effects of large-scale capital inflows into the economy.

GROWTH & DIVERSIFICATION

Diversification has been a key part of Azerbaijan's national strategy since 1991, and efforts over the last few years seem to be beginning to pay off. Using the prime oil and gas industry as a base, growth in the chemical industry was 34.2% in 2010, while the manufacturing equipment sector increased 7.9%, metallurgy grew 23.3%, and growth of 8.4% was seen in oil processing. Plans for the establishment of new oil and chemistry complexes have been drawn up, and “Comprehensive reforms in these areas will enable Azerbaijan to export oil, chemical, and industrial products in bigger volumes in the future," Natiq Aliyev, Minister of Industry and Energy, told TBY.

Other growth sectors include ICT, with President Aliyev telling TBY, “ICT is also considered to be the most important long-term growth segment of Azerbaijan's economy." The communications sector alone came in at 2% of GDP in 2010, and is growing in importance. In 2010 the sector grew at an astounding rate of 29.7%. IT is also on the up, with approximately 50% of the population now internet users, and one in 15 is said to own a computer, up from one per 1,000 several years ago.

Agriculture is another sector that is making its mark, representing 5% of GDP in 2010. A trend toward agribusiness has seen the agriculture industry gain importance of late, and it has also been designated as a priority sector. To support the sector and support much important entrepreneurs, tax holidays and exemptions have been granted to both local and foreign companies. Furthermore, VAT and customs duty exemptions have been introduced on equipment and machinery, as well as subsidies on fertilizers, fuel, seeds, and machinery.

Development in the tourism sector also echoes the overall development policy of the authorities. “The government has allocated fundamental investments for the formation of a modern tourism infrastructure, but hotels are constructed by the private sector", President Aliyev told TBY. The Ministry of Tourism and Culture is targeting 3 million visitors in the near future, and the opening of several new five-star hotels, as well as Azerbaijan's victory at the 2011 Eurovision Song Contest in Düsseldorf, Germany, look set to increase the country's standing as a must-see destination.

Further sectors designated as key areas for FDI by AZPROMO include alternative energy services, transportation and logistics, construction, the chemical industry, and light industry. Total FDI stock between 1995 and 2010 stood at $54.5 billion, and changing the global perception of the country is key to increasing the figure. In 2010 Standard & Poor's improved the long-term credit rating of Azerbaijan to BBB-, and Azerbaijan was given Investment Grade status by Fitch Ratings. “All the economic achievements in Azerbaijan are, obviously, being noticed by international financial organizations", Adil A. Mammadov, President of AZPROMO , told TBY.

REGIONAL TRADE & BEYOND

While Azerbaijan is fostering regional relations and trade through mega projects such as the Baku-Tbilisi-Kars (BTK) railway, the Europe-Caucasus-Asia (TRACECA) highway, and the International Sea Trade Port, it is also keeping a wide base of import and export partners. Its biggest export markets in 2010 were Italy, at 35%, Israel and France, at 9%, the US, at 8%, and Ukraine, at 5%. Its largest import partner was Russia, at 18%, Turkey, at 12%, then Germany, at 10%, and China, at 9%. The main export categories were raw oil and petrochemicals, fruit and vegetables, plant and animal oil, ferrous metals and products, chemical industry products, cotton, aluminum and products, alcoholic and non-alcoholic beverages, and tobacco. At the same time, major imports were machinery and equipment, vehicles and spare parts, foodstuffs, non-ferrous metals and products, pharmaceuticals, and wood and its by products.

The BTK railway is a sign that Azerbaijan is also finally looking to leverage its position as a hub between Europe and Asia. In comments made to TBY, Mikheil Saakashvili, President of Georgia, said that “The Baku-Tbilisi (Akhalkalaki)-Kars railway project signals a geopolitical transformation in our region because a completely new strategic link is opening not only between Georgia, Azerbaijan, and Turkey, but also Central Asia, China, and Europe", later commenting that while it “will take several hundreds of millions of dollars worth of investment", in the future it “will bring in revenue worth billions".

Relations with Russia also remain warm, despite competing interests regarding Nabucco and Europe's energy security. “Our countries are big players in the energy sector and we have many common interests because we both produce and supply energy resources. We therefore need to reach agreements in this sector, and we need to cooperate." Dmitry Medvedev, President of the Russian Federation commented to TBY.

While trade with Russia and other former Soviet states is declining in importance, Europe and Turkey are growing in economic significance for Azerbaijan. Long-term prospects, however, hinge on world oil prices, and the location of new oil and gas pipelines.

Azerbaijan's economy has cooled down from the giddy days of 34.5% growth recorded in 2006, as the first oil revenues started to flow into the economy. GDP growth at constant prices maintained a strong trend in the years following, coming in at 25% in 2007, then slowing to a more controllable 10.8% in 2008, and 9.3% in 2009. As growth slowed in the oil sector, as much a cause of reduced investment flows as it was to the lower oil price recorded over 2009, the non-oil sector has been seen to pick up the slack, with growth in ICT services particularly notable. GDP in PPP terms came in at $91 billion in 2010—a growth rate of 3.7%—as a result of the cooling oil price.

Over the period of 2008-2009, several non-export sectors posted double-digit growth, spurred on by expansion in the construction, real estate, and banking sectors. It is on this base that the authorities in Azerbaijan wish to build. Between January and June 2011, GDP grew 0.9%—slower than the growth rate experienced over the same period in 2010. “Our main goal is to develop the non-oil sector and diversify the economy," commented President Ilham Aliyev, adding that “7.2% growth was achieved in non-oil economy in the first six months of [2011], with 6.2% growth reported in agriculture." Despite the drive, however, challenges remain in attracting more FDI to the country, with the 2010 total coming in at $3.35 billion. More importantly than simply attracting FDI, it is into what sectors that the FDI is flowing that is becoming of importance to the government.

In 2010 Azerbaijan's total imports came in at $6.5 billion, paling in comparison to its exports, which were posted at $21.31 billion, 85% of which were petroleum exports. While trade with Russia still remains high, it is declining in the overall mix as ties build with neighboring Turkey as well as European nations. In that regard, the proposed Nabucco pipeline represents a significant opportunity for Azerbaijan to export its natural gas resources to Europe, not only boosting revenues but also providing for Europe's energy security, something which is almost certain to foster closer economic ties between Azerbaijan and the European bloc.

Aside from spending on economic diversification, the record $20 billion budget that the country boasts after an amendment in 2011, as well as the strategic currency reserves of up to $38 billion, have allowed the government to increase its focus on solving social issues. According to the authorities, average incomes increased 17% over the first six months of 2011, while pensions increased 40%. A state rural development program has also seen the creation of 38,000 jobs so far in 2011. Unemployment currently stands at 0.9%, while the population considered below the poverty line was approximately 11% according to 2009 estimates. Inflation also continues its decline, reaching 5.1% in 2010, as the Central Bank of Azerbaijan looks to sterilize the effects of large-scale capital inflows into the economy.

GROWTH & DIVERSIFICATION

Diversification has been a key part of Azerbaijan's national strategy since 1991, and efforts over the last few years seem to be beginning to pay off. Using the prime oil and gas industry as a base, growth in the chemical industry was 34.2% in 2010, while the manufacturing equipment sector increased 7.9%, metallurgy grew 23.3%, and growth of 8.4% was seen in oil processing. Plans for the establishment of new oil and chemistry complexes have been drawn up, and “Comprehensive reforms in these areas will enable Azerbaijan to export oil, chemical, and industrial products in bigger volumes in the future," Natiq Aliyev, Minister of Industry and Energy, told TBY.

Other growth sectors include ICT, with President Aliyev telling TBY, “ICT is also considered to be the most important long-term growth segment of Azerbaijan's economy." The communications sector alone came in at 2% of GDP in 2010, and is growing in importance. In 2010 the sector grew at an astounding rate of 29.7%. IT is also on the up, with approximately 50% of the population now internet users, and one in 15 is said to own a computer, up from one per 1,000 several years ago.

Agriculture is another sector that is making its mark, representing 5% of GDP in 2010. A trend toward agribusiness has seen the agriculture industry gain importance of late, and it has also been designated as a priority sector. To support the sector and support much important entrepreneurs, tax holidays and exemptions have been granted to both local and foreign companies. Furthermore, VAT and customs duty exemptions have been introduced on equipment and machinery, as well as subsidies on fertilizers, fuel, seeds, and machinery.

Development in the tourism sector also echoes the overall development policy of the authorities. “The government has allocated fundamental investments for the formation of a modern tourism infrastructure, but hotels are constructed by the private sector", President Aliyev told TBY. The Ministry of Tourism and Culture is targeting 3 million visitors in the near future, and the opening of several new five-star hotels, as well as Azerbaijan's victory at the 2011 Eurovision Song Contest in Düsseldorf, Germany, look set to increase the country's standing as a must-see destination.

Further sectors designated as key areas for FDI by AZPROMO include alternative energy services, transportation and logistics, construction, the chemical industry, and light industry. Total FDI stock between 1995 and 2010 stood at $54.5 billion, and changing the global perception of the country is key to increasing the figure. In 2010 Standard & Poor's improved the long-term credit rating of Azerbaijan to BBB-, and Azerbaijan was given Investment Grade status by Fitch Ratings. “All the economic achievements in Azerbaijan are, obviously, being noticed by international financial organizations", Adil A. Mammadov, President of AZPROMO , told TBY.

REGIONAL TRADE & BEYOND

While Azerbaijan is fostering regional relations and trade through mega projects such as the Baku-Tbilisi-Kars (BTK) railway, the Europe-Caucasus-Asia (TRACECA) highway, and the International Sea Trade Port, it is also keeping a wide base of import and export partners. Its biggest export markets in 2010 were Italy, at 35%, Israel and France, at 9%, the US, at 8%, and Ukraine, at 5%. Its largest import partner was Russia, at 18%, Turkey, at 12%, then Germany, at 10%, and China, at 9%. The main export categories were raw oil and petrochemicals, fruit and vegetables, plant and animal oil, ferrous metals and products, chemical industry products, cotton, aluminum and products, alcoholic and non-alcoholic beverages, and tobacco. At the same time, major imports were machinery and equipment, vehicles and spare parts, foodstuffs, non-ferrous metals and products, pharmaceuticals, and wood and its by products.

The BTK railway is a sign that Azerbaijan is also finally looking to leverage its position as a hub between Europe and Asia. In comments made to TBY, Mikheil Saakashvili, President of Georgia, said that “The Baku-Tbilisi (Akhalkalaki)-Kars railway project signals a geopolitical transformation in our region because a completely new strategic link is opening not only between Georgia, Azerbaijan, and Turkey, but also Central Asia, China, and Europe", later commenting that while it “will take several hundreds of millions of dollars worth of investment", in the future it “will bring in revenue worth billions".

Relations with Russia also remain warm, despite competing interests regarding Nabucco and Europe's energy security. “Our countries are big players in the energy sector and we have many common interests because we both produce and supply energy resources. We therefore need to reach agreements in this sector, and we need to cooperate." Dmitry Medvedev, President of the Russian Federation commented to TBY.

While trade with Russia and other former Soviet states is declining in importance, Europe and Turkey are growing in economic significance for Azerbaijan. Long-term prospects, however, hinge on world oil prices, and the location of new oil and gas pipelines.