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ACRA forecasts growth of Azerbaijani economy

25 July 2018 [14:00] - TODAY.AZ

By Azernews


By Kamila Aliyeva

The Analytical Credit Rating Agency (ACRA) expects Azerbaijani economy to grow by 1.5 percent due to recovering external demand for a basic export commodity and growing non-primary economy as a phenomenon of delayed activity. 

However, until 2022, no significant growth drivers are expected to emerge, and the annual growth will be within 3.2 percent, according to ACRA’s report “Azerbaijani economy: 2022 outlook”.

“After the recession in 2016 and the 0.1 percent growth in 2017, the economy of Azerbaijan began to show a gradual recovery at the turn of 2017-2018. At the same time, the growth in real terms in non-primary sectors amounted to 1.9 percent in January-May, outperforming similar indicators in aggregate terms (1.1 percent),” the report said.

The ACRA analysts noted that in January-May this year, economic growth strengthened in virtually all segments of the real sector, which showed significant positive dynamics in real terms, except for construction sector that showed an 11.2 percent decline.

“The most significant growth was observed in agriculture (8.5 percent), the least significant — in freight transport (0.9 percent). At the same time, due to the significant influence of the oil sector on both the country's industry and the GDP, as well as due to the restrained dynamics in the oil industry, the overall economic growth (y-o-y) in January-May was more modest: from 1.1 percent to 2.3 percent in different months of the current year,” the report said.

Against the background of the restoring economic activity, oil dependence is also restoring in Azerbaijan, the experts noted, saying that the share of oil industry in the GDP was 43 percent in 2017. This tendency will continue throughout the whole forecast horizon.

The ACRA stated that the regulator has managed to cap the inflation in Azerbaijan, which reached double-digit values in 2016 and 2017.

“The surge was caused by a shock in the exchange rate dynamics and a high level of import dependence,” the report said.

According to ACRA estimates, in 2018–2022, the inflation will be in range 4–6 percent, following the counter-cyclical regulatory policy and the end of the translation of the exchange rate shock into price formation.

Among the main expected effects of the moderate inflationary background for the Azerbaijani economy are the continued growth of real incomes of the population and the potential revival of lending to the real sector, which is still in the shrinking zone since the end of last year, the report said.

“However, the banking sector problems, including low public confidence, a sharp reduction in the number of commercial banks, lower volume of investments in fixed assets, can hinder the development of the real non-primary sector of the economy. These difficulties forced the government to offer 100 percent guarantees for retail deposits and to accelerate the restructuring of IBA,” ACRA said.

In the absence of further shocks in external demand, the manat exchange rate will be stable, according to the analysts.

They, however, note that significant dependence of the economy on mineral resources remains the main risk. At the same time, the basic forecast scenario implies a low probability of worsening demand.

The trade balance will remain positive, provided that price for Azeri Light is $45 per barrel or higher. In this case, manat will demonstrate stability. The probability of devaluation is low.

“The main expectation is a relatively stable exchange rate of the national currency, with a fluctuations corridor of 1.66–1.73 against the U.S. dollar, with the prospects for strengthening to 1.66 at the end of the forecast period,” the report said.

Also, ACRA expects the economic activity in Azerbaijan to recover to 2.2–3.2 percent in 2019–2022, but real growth rates will not be able to reach a more significant trajectory.

“In second half of 2017–2018, the basic impetus for economic activity in Azerbaijan is occurring exclusively on the wave of deferred growth in the non-primary sector of the economy and due to the increase in export earnings,” the report said.

The ACRA analysts also expect some revival in the primary sector in second half of 2018.

“The Southern Gas Corridor has already been put into operation, through which gas will be supplied from Azerbaijan to Turkey and further to Europe via the TANAP gas pipeline. This will allow Azerbaijan to improve its balance of payments and to strengthen the indicators of growth in the primary sector of the economy,” according to ACRA.

ACRA believes that a potential event that may lead to a more positive assessment for systemic improvement of credit quality in Azerbaijan is the privatization of the largest state-owned bank, IBA, expected in 2018.

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