Azerbaijan's forex still secures against low oil prices

/By AzerNews/

By Gulgiz Dadashova

The high level of foreign assets of the energy-rich Azerbaijan provides a large buffer to mitigate the adverse effect from the decline in oil prices on the country's economy, says Moody's Investors Service in a new research report.

The sovereign has Baa3 foreign and local-currency government bond ratings with a stable outlook.

Oil exports make a large share of Azerbaijan’s total export earnings. Over 86 percent of exports in Azerbaijan account for the oil export. Also, natural gas and petroleum products make up a significant portion of the export basket of the country. Gas exports account for additional 6 percent of exports, which makes the country one of the most energy-export dependent countries in the world.

A 60 percent slump in oil prices since last November has caused havoc for many energy exporting countries. Oil prices, according to many economic forecasts, will remain subdued throughout 2015. Prices for petroleum products and natural gas will likely fall as well.

Moody's noted that the oil price drop has already delivered a significant shock to the oil-reliant Azerbaijani economy and pressured the sovereign's balance sheet. However, Azerbaijan's large stock of foreign assets -- worth roughly $42 billion as of the end of the first half of 2015 -- give the country time to adjust to lower oil prices, according to the report.

"Azerbaijan's sizeable foreign assets enable the government to let fiscal deficits widen during periods of lower oil prices, weaker growth and reduced fiscal revenues," said Sebastian Becker, a Moody's Assistant Vice President - Analyst.

Furthermore, over the past decade, Azerbaijan's public balance sheet benefited from surging hydrocarbon-related government revenue that resulted from higher domestic oil output, according to Moody’s. The windfall revenues from oil enabled the government to keep gross debt low and to accumulate large foreign reserves with the Central Bank of Azerbaijan and Azerbaijan’s state oil fund SOFAZ.

"However, Azerbaijan remains strongly reliant on the oil and gas sector, and thus remains vulnerable to a potential further decline in oil prices," added Becker. "The sovereign will continue to rely on hydrocarbon revenues to develop its non-oil GDP sectors."

Azerbaijan’s CBA announced a 34-percent devaluation of the national currency manat against the US on February 21 with a view to preserve the foreign currency assets. Experts say Azerbaijan’s trade surplus has been so large in the past, even a 40 percent fall in dollar export revenue can keep Azerbaijan in surplus for the short to medium term.

Crude oil futures rebounded after four days of sharp losses on October 16, amid indications U.S. oil drillers are cutting back on production following a collapse in prices over the summer. On the New York Mercantile Exchange, crude oil for delivery in November jumped 88 cents, or 1.9%, to end Friday's session at $47.26 a barrel.

On the ICE Futures Exchange in London, Brent oil for December delivery Tacked on 73 cents, or 1.47%, on Friday to close the week at $50.46 a barrel. London-traded Brent futures still lost $2.18, or 4.16%, on the week, as ongoing worries over the health of the global economy fueled concerns that a global supply glut may stick around for longer than anticipated, according to investing.com.