Country risk: Azerbaijan is on its way back


Jeremy Weltman
Published on:

Improving growth and twin surpluses should give some heart to potential investors eyeing recent political changes heralding economic reforms, but maintaining momentum is key.


The snails at Heydar Aliyev Centre in Baku, Azerbaijan, reflect the country's slow progress - but progress it is

Azerbaijan’s fall from grace was more catastrophic than other oil producers in the region, with GDP contracting by a fearsome 3.1% in real terms in 2016 in the wake of the negative oil shock and attendant currency devaluation.

Recovery from the crisis has nevertheless continued, prompting 2.4% GDP growth in the first half of this year that will go some way towards addressing the social problems caused by the currency collapsing and real incomes declining.

The government is moreover upbeat about prospects for 2020, proclaiming growth will be 3%, with non-oil industrial production expanding by 8.8% and agriculture by 4.8%. So, too, are quasi-independent forecasters such as the IMF, plus independent experts.

Most agree the non-oil parts of the economy are helping to offset sluggish hydrocarbons production. Predictions for trade, tourism and other types of services are as equally ebullient as for farming and manufacturing.

And while Azerbaijan is not immune to global trade frictions, it is at least in a better position now to withstand the risks.

Political risk

Confidence in the country has never been particularly strong, though, due to political risks.

As with other countries in the region, analysts have long harboured reservations about various aspects of the political climate, including the institutions, regulations and policymaking marked down with low values in Euromoney’s survey metrics.

President Ilham Aliyev rules the country with an iron fist, and any hope for democratic change is routinely stifled by the heavy-handed responses of state security forces providing little space for dissent, or journalistic independence.

Yet, as Thomas de Waal writes for Carnegie Europe, Aliyev appears to be demonstrating greater urgency for reforms, by promoting more energetic and efficient individuals, including Ali Asadov, a close aide, as prime minister, and openly criticizing the old guard.

These moves are clearly in response to a disgruntled population demanding their own lives are improved as much as infrastructure and Azerbaijan’s international standing, with parliamentary elections looming in 2020.

The appointment of Mikayil Jabbarov to replace Shahin Mustafayev as the minister of economic development is a positive move 
 - Risk expert

The New Azerbaijan Party (YAP) is unlikely to lose control over the legislature. There are far too many small opposition parties, as well as other obstacles, to mount any serious challenge to the incumbency, but YAP must still be seen to be more responsive to the needs of ordinary citizens.

“There is clearly urgency to tackle tax and other economic reforms,” states one of Euromoney’s risk experts, who asked not to be named, but who sees scope for more upgrades to Azerbaijan’s risk profile, given time.

“The appointment of Mikayil Jabbarov to replace Shahin Mustafayev as the minister of economic development is a positive move, given his expertise and reformist credentials, as is the wrapping-up of the tax and state property portfolios under the economy umbrella. It is long overdue.”

There may be still no realistic opportunity for opposition parties to upset the status quo, but as De Waal notes from his conversation with Ilgar Mammadov, a prominent opposition leader, the removal of Ramiz Mehdiyev as head of the presidential administration is a notable development, as are other changes at the top.

Economic recovery

It’s true, Azerbaijan is still riskier than some of the other former parts of the Soviet Union, including Kazakhstan, but at 97th in the global rankings, it ranks on a par with Bolivia, Nigeria and Senegal, and has seen its risk score steadily upgraded for the past two years.

A more comfortable oil price and stable currency have been driving the mood change.


The improvement is therefore largely down to macroeconomics to date.

Along with GDP contracting, and then recovering, consumer price inflation has come down from its double-digit highs in 2016-2017 caused by devaluation, and is now in line with the mid-point of the central bank’s 4% +/-2% target range.

The current account moreover shows a comfortable surplus of roughly 10% of GDP, and foreign currency reserves provide ample imports coverage of around four-to-five months, added to which there are sovereign wealth fund assets worth a reported $42 billion.

Risk experts have also responded favourably to the new fiscal rule approved in 2018, guiding medium and long-term public expenditure management by determining an upper limit on oil wealth to be utilized in the budget. Ultimately, it constrains pro-cyclical economic policy.

The consolidated fiscal balance moved back into surplus last year, and is likely to be 3% to 4% of GDP in 2019-2020, depending on prevailing hydrocarbons prices and production. The upshot of this: the total burden of general government debt and state-guaranteed liabilities should peak this year, before dropping below 50% of GDP in 2020.

However, so much for economic improvement, can investors really anticipate political change, as De Waal is asking?

That might not be the most appropriate question for investors more concerned by opportunity and stability determining whether the risk-return trade-off is improving sufficiently for Azerbaijan to be considered the most viable option.

With the picture slowly brightening, the country is, in any event, already less risky than it has been for years.

Investors will likely take that with a degree of satisfaction.

Anything more, in terms of transparency, tax incentives or contractual guarantees, would provide a bonus.