OIL CRYSTAL BALL
The global oil forecast calls for subdued optimism alongside a healthy dosage of patience for Azerbaijan.
While it is certainly true that this economic era in Azerbaijan has been characterized largely by the rapid expansion of non-oil sector development and investments, the fact remains that oil plays an overwhelmingly large role in the national economy. As further proof of the strong financial connection, the global free fall of the price of a barrel of oil by 3-4 times was ultimately responsible for the Central Bank of Azerbaijan's decision to introduce a floating exchange rate regime and to abandon its currency peg on the dollar. The country was losing revenue and quickly burning through its foreign currency reserves in an attempt to keep the value of the manat at a steady level. The country's financial institutions spent billions in the effort to keep the manat propped up against the low oil price and the government was forced to redo the 2016 state budget, fixing the price of oil at $25 per barrel instead of the initial state forecast of $50. Despite this reality, the bulk of foreign investment flows to Azerbaijan was still focused on the oil sector in 2015, which shows that many investors feel strongly that this low oil price is merely a passing phase. Thus, analyzing the current oil market prices and trends is a hot science right now.
In its January 2016 report, the World Bank lowered its oil cost predictions from $51 in October of 2015 to a $37 price per barrel average over the year 2016. The World Bank based this analysis on a variety of trends and international economic factors, including the fact that while supply continues to grow, demand is not keeping apace. This is most importantly the case in emerging economies. An interesting fact cites that these emerging market economies, which have entered into economic slumps as of late, have been the principal drivers of growth in the commodities markets since the year 2000. China is a particular focal point in this discussion, as it is the world's second largest crude oil importer (behind only the US). Some are calling into question the effects of the economic turbulence that have been seen in the country over the past year. China's crude imports decreased by almost 5% compared to the year before, which is also another worrisome sign. In addition, the resumption of Iranian oil output on the international market will further complicate the situation of the already weak demand. Financial services corporation Morgan Stanley also decreased their forecast on the average price of a barrel of oil from $49 to $30 for the year 2016 and investment giant JP Morgan also projected a 2016 forecast of $31.50.
An interesting historical perspective and point of view to keep in mind, this is certainly not the first time the global oil markets have dipped this low. While the price did fall at a fast rate in this instance, a comparable phenomenon happened in 2009, with oil prices suddenly dropping by $100 per barrel compared to the year before. After 2009, oil prices started to slowly creep back up. In addition, the price of a barrel of oil was under $60 for almost the entire period of 2000-2005, before widely jumping around for the next decade. In fact, from the end of 2009 until the big drop of 2014, the price of oil never dipped below $60 per barrel (based on Brent prices) and averaged almost $100 per barrel during this time. A poll of 13 investment banks taken by The Wall Street Journal reveals that they do not think that oil prices will reach $70 per barrel again until 2018, and the aggregate average of all these banks' predictions puts the oil price as posting modest, but significant growth to $46 per barrel as early as 4Q2016. While the ups and downs of this famously volatile market are important to keep in mind when discussing the future, economists at the World Bank agree that the price of oil will indeed stage an increase, but this rise will not be as substantial of an increase as the market has seen in years past. The low prices in the oil market will also help encourage Azerbaijan's advancements in other important economic areas.
OIL CRYSTAL BALL
TABLE OF CONTENTS
Year In Review
Good Times Ahead
<strong></strong><strong>In a year dominated by the overarching theme of low hydrocarbons prices, Azerbaijan showed resilience and verve in putting in place bold measures both to counter the slump in energy prices and put its economy on a surer footing.</strong>
read articleReview: Diplomacy
Operation Outreach
In 2015, Azerbaijan's military budget increased by a notable 27%, to $4.8 billion, or 17.9% of the government's total budget for the year. The first Azerbaijan Defence Exhibition (ADEX 2014), drew over 200 companies from 34 countries, including Russia and the US.
read articleInterview
Rufat Mammadov, President, Azerbaijan Export and Investment Promotion Foundation (AZPROMO)
TBY talks to Rufat Mammadov, President of the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), on large-scale events and their ability to attract FDI and the potential Iran may hold.
read articleReview: Banking
More Interest
In a sector faced with relatively flat growth for 2015-16, new opportunities are still there aplenty, led by the nascent Islamic banking sector, e-banking, and microfinance initiatives. Together, these areas should make banking more diversified and less reliant on a buoyant energy sector for its capital inlay.
read articleReview: Capital Markets
Taking Stock
As Azerbaijan grapples with the knock-on effects of low hydrocarbon prices, the Baku Stock Exchange (BSE) finds itself at the center of the country's efforts to stave off a budget deficit this year. In January, the government announced plans to sell $500 million worth of bonds on the BSE.
read articleInterview
Khanlar Fatiyev, , Chairman of the Supervisory Board, Ganja Automobile Plant Production Association
TBY talks to Khanlar Fatiyev, Chairman of the Supervisory Board of the Ganja Automobile Plant Production Association, on the role of the plant in driving growth in the non-oil sector.
read articleReview: Agriculture
Lots More
Farms across the country are pursuing a policy of increased yields for year-round fruit and in the wheat harvest to stave off an over-reliance on imports. With carefully targeted increases in exports, better routes to port and to market, and greater sophistication of agricultural facilities, farming could soon be the morning star of Azerbaijan's diversified economy.
read articleReview: Education
Baku to School
Azerbaijan's culture has always harbored a deep respect for educational values. This is embodied in the country's Azerbaijan 2020 mission statement, which seeks to raise standards across the sector and introduce ICT as a standard part of the learning experience at all levels.
read articleInterview
Elkhan Mammadov,, Secretary General, Association of Football Federations of Azerbaijan (AFFA)
TBY talks to Elkhan Mammadov, Secretary General of the Association of Football Federations of Azerbaijan (AFFA), on the experience Azerbaijan is gaining in hosting international events.
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