Azerbaijan Trip Notes - Managing Through the Pandemic

Last week, we took a "virtual trip" to Azerbaijan during which we held talks with officials and representatives from the Central Bank (CBA), Finance Ministry, Sofaz and SGC. Like the rest of the world, the country is facing the challenges of the coronavirus and the drop in oil prices, but with Brent now above $40/bbl, the situation looks manageable to us. The government has accumulated vast reserves (equivalent to more than 90% of GDP) that it stands ready to deploy to boost the economy and finance the budget deficit.> We project the Azeri economy will shrink 4.8% this year. The economy contracted by 1.7% in 5m20, with the non-oil sector shrinking 2.1%. Consumer-facing sectors such as retail, tourism, catering and other services bore the brunt of the lockdown. The drop in oil prices and the OPEC+ production cut deal have also had a big impact on the oil sector. We expect GDP to drop by as much as 4.8% this year before rebounding strongly next year.> We see the budget deficit this year at 8% of GDP. The government introduced AZN3 bln worth of fiscal measures (approximately 4.5% of GDP) to support the economy during the pandemic. Budget revenues have come under pressure not just from the drop in oil and gas revenues (due to the oil price weakness and the OPEC+ production cut) but also due to weaker economic activity during the lockdown. As a result, we expect a consolidated budget deficit of almost 8% of GDP this year.> CBA faced high FX demand in March and April, but the situation calmed down in May. The oil price plunge sparked manat devaluation fears and fueled dollar demand among the population. To satisfy this demand and defend the currency peg, Sofaz (the sovereign oil fund) sold $2.5 bln in March and April.> Debt market activity. The government does not plan to tap the international debt market this year but may do so at some point in the coming years. In the meantime, we have seen some progress in the development of the local debt market, and Azerbaijan is currently working with both Clearstream and Euroclear to open the market to foreign investors.