ADB: New Devaluation Is Possible in Azerbaijan

ADB: New Devaluation Is Possible in Azerbaijan

The Asian Development Bank (ADB) has published today an update to its report Asian Development Outlook (ADO 2015 update), sharply reduced the projected surplus of current account of Azerbaijan’s balance of payments.

According to ADO 2015 update, the forecast of Azerbaijan’s surplus for 2015 was reduced from 12% to 6% of GDP and in 2016 from 13.4% to 8% of GDP.

At the same time the Bank has kept the forecasts on other economic parameters at the same level. So, in 2015 GDP, as it was expected, will grow by 3% and in 2016 by 2.8%. Inflation, in full accordance with the initial forecast, will make up 6% this year and 5.5% next year.

At that, the ADB emphasized that the economy rebounded with robust growth of 5.7% in the first half of 2015, up from 2.1% in the same period in 2014. Boosted mainly by government capital expenditure, the economy outside of the large petroleum sector was the major driver of growth.
“The public investment program remains a key source of economic expansion and employment, but budget revenues are under pressure from lower oil prices. Despite low prices, oil production in the first half of the year rose by 1.3%, reversing a 3.9% contraction in January–June 2014, but is expected to level off for the rest of the year to allow annual maintenance. Despite a reduction in spending from the budget plan, fiscal policy is expected to remain somewhat expansionary in 2015 to support the economy,” the ADB emphasized.

According to ADB estimate, the 2016 budget is being tightened, as low petroleum prices have led to the postponement of some investment projects.

Notwithstanding these developments, this Update maintains ADO 2015 growth projections for 2015 and 2016.

“Official foreign currency reserves fell by more than 30% in January-August 2015 because the central bank intervened to maintain the new exchange rate after the February 2015 devaluation of the Azerbaijan manat. Oil prices, key to local currency stability, have fallen dramatically over the past year, from $103.08 per barrel of Azeri light crude in August 2014 to $46.23 a year later. Declining foreign currency reserves and oil prices are putting further pressure on the manat and could trigger another devaluation if recent trends continue over the coming months,” the ADB said.

According to ADB’s estimate, dollarization is the main concern in the banking sector, as US dollar deposits almost doubled after the devaluation.

To limit inflation, the central bank has reduced local currency liquidity. With tepid domestic demand largely offsetting price pressures from the devaluation, year-on-year inflation rose to only 3.5% in the first half of 2015, which was nevertheless up from 1.6% for the same period in 2014. The devaluation will continue to put inflationary pressure on imports other than food.

Although domestic demand and prices for imported food are expected to moderate, this Update retains ADO 2015 inflation forecasts for 2015 and 2016.

The plunge in global petroleum prices caused hydrocarbon exports to plummet by 47% in the first quarter of 2015, narrowing the trade surplus and slashing the current account surplus to 0.5% of GDP in the first quarter of 2015. As oil exports are expected to remain weak and imports have been higher than projected earlier, this Update halves the forecast for the current account surplus for 2015 and, for 2016, reduces the forecast surplus a bit less.

ADB says that Azerbaijan is less susceptible to direct impact of lower world oil prices than, for example, Kazakhstan.

According to the ADO 2015 update, direct negative impact of falling commodity prices will reduce GDP of Azerbaijan by not more than 0.1% of GDP, while a decline of 2.7% of GDP awaits Kazakhstan.

At that, oil brings 85% of the total export revenue to Azerbaijan and only 65% to Kazakhstan.

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