COME RAIN OR SHINE

Azerbaijan 2012 | ECONOMY | REVIEW: ECONOMY

Over the past two decades of independence, Azerbaijan has sought to leverage its hydrocarbon wealth to create a regional economic powerhouse.

The non-oil sectors got their opportunity to shine in 2011, as oil exports slowed in volume terms due to planned upgrades over the year. Strong oil prices, however, kept the money flowing in as investments across the board picked up pace. The non-oil and gas sector kept the economy ticking over in 2011, as GDP grew by 0.1%. As a result of the government's drive to diversify the economy, output in the non-prime sectors grew by 9.4% in 2011, helping to cover the 9.3% drop in the hydrocarbon industry. Indeed, the country's nominal GDP hit $55.87 billion in 2011, with per capita GDP coming in at AZN5,531, or just over $7,000.

Solid growth in the non-prime sectors was seen in mining, agriculture, industrial production, tourism, processing, and ICT, in addition to construction, which is staging a comeback thanks to large-scale infrastructure and urban development projects such as the new Port of Baku, expansion at Heydar Aliyev International Airport, and various residential, commercial, and office developments, including Baku Crystal Hall, the venue for the Eurovision Song Contest 2012. The government has also adopted its 2012 budget, with anticipated revenues of $20.9 billion, based on the presumption that the average price of oil will be $80 per barrel over the year. Expenditure was set at $21.7 billion. However, with the price of oil running at $129 per barrel in February 2012, revenues could be higher than expected, offsetting the predicted deficit of $806 million. The State Oil Fund (SOFAZ) also expanded its assets in 2011 as a result of the strong oil prices. The fund is set to provide approximately 64% of the government budget, a figure still on the high side, with private economists reporting that a figure closer to the 30% mark would be a more ideal situation going forward. Foreign trade also registered growth of 9.2% in 2011 over 2010, with $3.31 billion worth of non-crude exports, and an overall trade surplus of $14.76 billion.

Other indicators of economic growth included the rapid inflation rate and creation of new jobs. In 2011, inflation was predicted at 8%, largely due to an increase in commodity prices, especially on the food and consumables side. Unemployment decreased slightly over 2011, coming in at 5.4%, down around 0.5% from the previous year. Approximately 94,000 jobs were created across the economy, 77% of which were full-time, permanent positions. According to the State Statistical Committee of the Republic of Azerbaijan (Azstat), as of December 2011 78.5% of people were involved in the services industry, while 21.5% were concentrated in product output. There is a strong focus on education in Azerbaijan, with 24.6% of all employed persons in the service sector concentrated in the education segment. At the same time, 19.8% are involved in trade, 12.3% in industry, 9.7% in health and social services, 6.3% in construction, 4.8% in transport and warehousing, 3% in the professional, scientific, and technical sphere, 3% in the agriculture, forestry, and fisheries sector, and 1.8% in ICT, the latter of which is expected to grow exponentially in the coming period.

Moving into 2012, economic growth should pick up as the country's hydrocarbons begin flowing at full pace again. The IMF has forecast GDP growth at 5.7%, yet growth is likely to depend on the price of crude oil on the world market over the course of the year. According to Azstat, the country's GDP over the first two months of 2012 was AZN8 billion, up 0.5% on the same period in 2011.

THE BUDGET

SOFAZ's expanding revenues are lending a strong hand to the government's strategy to increase production in the non-oil and gas sector, as the authorities look to re-invest petrodollars to boost diversification across Azerbaijan's growing industrial portfolio. The budget for 2012 was set at $20.9 billion, 5.7% higher than in 2011, while expenditure is anticipated at $21.7 billion.

The social services have also been allocated additional funding for 2012, including health care, which will receive an additional AZN63.3 million, and education, which will receive AZN4.6 million more. The expanded healthcare budget has been earmarked for restructuring in the sector, as facilities are consolidated and upgraded under the Ministry of Health. Investments in social services and security also continue, as an additional AZN4.2 million was allocated to social security in 2012. In 2011 the percentage of the population living below the poverty line fell 1.5% to just 7.6%, a remarkable turn around from the position a decade ago when nearly two-fifths of the population fell below the poverty line.

Transport and communications will also receive a further AZN3.9 million over the allocation for the 2011 budget. ICT and transport are hot on the government's investment agenda, and have been identified as key growth areas, although the private sector has been given the lead to develop these sectors.

In terms of the public budget, SOFAZ will contribute $12.5 billion over 2012, as its overall assets “are expected to reach around $34 billion by the end of 2012," Shahmar Movsumov, Executive Director of SOFAZ, told TBY. Defense spending is also set to increase in 2012, reaching AZN1.38 billion, registering modest growth from the AZN1.27 billion recorded in 2007.

NON-OIL & GAS SECTOR

There was a planned drop in oil export volumes in 2011, as the sector undertook an upgrade program. However, the slowdown on the oil and gas exports side has helped reveal the growing ability of the non-oil and gas sector to sustain economic growth. The non-oil and gas sector accounted for AZN21.5 billion of total GDP in 2011, driven by a growing industrial base, a strong ICT sector, and booming agriculture and construction sectors. The ICT sector registered the fastest growth, increasing its share of GDP by 11.8%. Mobile telephone penetration exceeded 100% for the first time in 2011, and 50% of the population had access to the internet, largely due to decreased usage tariffs. Driving the IT sector was the increased assembly of computers and electronic equipment, which registered 24.5% growth. Indeed, “2012 is an important year for the sector with the launch of Azerbaijan's first satellite, the Euro-Persia Express Gateway Project, as well as other initiatives," Zaur Mammadzade, General Director of ULTRA, told TBY.

Other sectors demonstrating rapid development were agriculture, retail commodities, and transport. The agriculture sector grew by 5.8% in 2011, largely driven by grains, vegetables, dairy, and poultry, as the effects of the 2010 floods were shaken off. Retail commodity turnover increased by 10.6%, with customers spending an average of AZN151 more on domestic products and services over the course of the year. These products were delivered through public and private enterprises, marking a 3.6% growth in cargo transportation. Passenger transportation also witnessed an increase of 7.5% in year-on-year terms over 2011.

According to Shahin Mustafayev, the Minister of Economic Development, “Azerbaijan's rapid GDP growth between 2004 and 2011 can be attributed to efforts aimed at diversifying the economy, as industrial production has increased by 2.7%, agriculture by 1.3%, construction by 3.2%, transport by 2.3%, and ICT by 6.4%."

Both public and private investors supported these initiatives, with SOFAZ at the forefront as a major source of funding for large-scale strategic projects of national importance. “The three pillars that define SOFAZ's role are: the preservation of macroeconomic stability through fiscal tax discipline, the reduction of dependence on oil revenues, and the development of the non-oil sector," SOFAZ's Movsumov, told TBY. With this motivation, SOFAZ has expanded its non-prime sector investment portfolio, with a significant portion of its total assets, which are expected to reach $200 billion over the next 10-15 years, allocated to diversification efforts. The strong price of oil will also keep money trickling down into the non-prime sectors in 2012, and foreign investment will also give them a boost. “Once Azerbaijan completed its transition to a market economy, it entered a new stage of development and the main objective now is to increase production capacities and competitiveness, and develop an export- and innovation-oriented economy," Minister Mustafayev told TBY.

BUILDING AGAIN

The construction sector received an unexpected boost in 2011, as work began on the Baku Crystal Hall in preparation for Eurovision 2012 after the country's victory in the contest in 2011. Other major projects also underway include the expansion of Heydar Aliyev International Airport, and the relocation of the Port of Baku, as well as numerous mixed-use developments and other regional infrastructure efforts. The value of the sector was estimated at $3.88 billion in 2010, and grew at a rate of over 10% in 2011. Although growth is expected to slow heading toward 2015, long-term projects will keep the engines running apace.

Infrastructure projects represent the largest share in the overall sector, at 36.5%, while commercial construction comes in second at around 20%. Growth will also be fuelled by planned domestic energy infrastructure expansion in 2012, with hopes that the country can further reduce or eliminate its reliance on energy imports on the electricity side. “Within the last two years, 10 new power-generation stations have been created, transforming Azerbaijan from an energy importing country to a reliable energy exporter," Azer Mursagulov, Advisor to the Executive Director at the IMF, told TBY.

Regional interconnection is also set to improve as the Baku-Tbilisi-Kars railway nears completion, connecting Turkey, Georgia, and Azerbaijan with Europe 105 kilometers of track. The country also invested in the construction of 15 industrial facilities, 11 healthcare institutions, four Olympic standard sports complexes, and schools with the capacity to seat more than 13,000 students. Furthermore, a total area of 1.9 million sqm in residential housing was provisioned for in 2011.

TRADE

Overall crude exports dropped in 2011, resulting in an overall decrease in exports of 3.8%. The figure is expected to pick up in 2012, however, and will continue to rise once Azerbaijani gas begins to flow faster out of Shah Deniz and newly discovered gas fields in the Caspian Sea. Europe remained the country's top export destination, accounting for almost 60% of total exports. Of the goods it sends to EU countries, almost 99% is mineral resources, and oil and gas in particular. To facilitate trade and to incentivize the transportation of goods according to European standards, the EU allows the tax-free transportation of 6,000 Azerbaijani goods into the bloc. The CIS region also figures heavily in Azerbaijan's export portfolio, and “the country was recognized as the most competitive economy in the CIS in the World Economic Forum's Global Competitiveness Index 2011-2012," Minister Mustafayev commented. The country recorded trade with some 150 countries, and has increased its foreign trade turnover by 6.4% in the last eight years. Italy is far the country's top export partner, with $7 billion-worth of products exported to the country in 2010. Ukraine is Azerbaijan's biggest trading partner in the Caucasus, with $888-million worth of goods sent there in 2010, followed by the Russian Federation with $773 million. Exports have also increased to the country's South Caucasus neighbor Georgia, with exports worth $410 million in 2010, a large chunk of which is natural gas and oil products.

WTO accession talks are also continuing into 2012, with efforts to harmonize tariffs and amend legislation the targets before the country becomes a member. The country applied to the WTO in 1997, and currently has observer status. The incentives to join are high, with the EU ready to negotiate a free trade agreement with Azerbaijan once it becomes a full WTO member.

FDI

Azerbaijan received $100 billion in investments between 2003 and 2011, and “half of it was FDI," Minister Mustafayev told TBY. Within the region, the $3 billion in FDI that Azerbaijan attracted in 2011 far exceeded that of neighboring countries, with Armenia attracting $1 billion, and Georgia attracting $643 million over the first three quarters of 2011.

To keep investments flowing, the government has also worked to strengthen the business environment in the country. “The government has introduced notable reforms on the institutional front, particularly through the fight against corruption, administrative improvements in tax, customs and business registration, and the move to draft a competition law," Joseph M. Owen, World Bank Country Manager in Azerbaijan, told TBY.

Hopes remain high for the future, especially in a year when Azerbaijan plays host to the Eurovision Song Contest, which is hoped to have a long-lasting impact on international opinions about the country. As the country then heads toward a decision on its bid to stage the 2020 Olympics in 2013, Azerbaijan aims to continue the march toward economic diversification through the prudent use of oil wealth and the attraction of foreign investors to develop and diversify. However, the challenge to wean the state budget off its reliance on injections from SOFAZ remains, and the balance between investing today to improve general economic rewards in the future and the need to diversify economic inputs remains.