Azerbaijan

Azerbaijan’s high dependence on the hydrocarbon sector and global oil and gas prices has resulted in a regime of low and volatile GDP growth since 2011, with annual average real GDP growth of just +1.5% over the past 13 years. In 2021-2022, the country experienced a strong rebound from the double whammy of the global Covid-19 pandemic and the slump in oil prices in 2020. Real GDP grew by +5.6% in 2021 and +4.6% in 2022 after dropping by -4.2% in 2020. The rebound was broad-based, driven by domestic demand and a strong expansion in the non-oil-and-gas sector as Azerbaijan recovered from the pandemic. The oil and gas sector was boosted by rising global oil and gas prices due to the war in Ukraine. However, economic growth decelerated markedly to just +0.8% in the first 11 months of 2023, with the hydrocarbon sector contracting by -1.6% while the non-oil and gas sector expanded by a resilient +3.2%. It appears that the economy has not yet benefited from increasing European demand for Azeri oil and gas. Looking ahead, we forecast annual real GDP growth to pick up to around +2.5% in 2024-2025.

Consumer price inflation accelerated from an average of 2.8% in 2020 to 6.7% in 2021 and 13.9% in 2022 on the back of surging global food and energy prices as well as supply disruptions, as seen elsewhere in the emerging market world. The Central Bank of Azerbaijan (CBA) responded with gradual monetary tightening; it hiked its key policy interest rate in ten steps from 6.25% in September 2021 to 9.00% in May 2023. Headline inflation peaked at 15.6% y/y in October 2022 and remained in double digits until mid-2023 before rapidly falling to 2.6% in November, as a result of higher interest rates, sluggish domestic demand and base effects. As the latter will wane this year and the CBA has begun with moderate rate cuts, we expect inflation to pick up to an average annual 3.5% to 5% in 2024-2025.

In April 2017, the CBA shifted back from a floating exchange rate regime to a “stabilized arrangement”, with the manat (AZN, the local currency) trading at 1.70:1.00 versus the USD, which has been maintained until early 2024. However, analysis of the real effective exchange rate has indicated a significant overvaluation of the AZN since Q3 2021, which amounted to around 12% at end-2023. Hence there is a considerable risk of a sudden sharp depreciation or devaluation of the AZN in the event of a domestic or external shock to the economy.