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Oil price drop: Azerbaijan relies on non-oil sector

28 November 2014 18:47 (UTC+04:00)
Oil price drop: Azerbaijan relies on non-oil sector

By Gulgiz Dadashova

The decision of Organization of Petroleum Exporting Countries to maintain its oil output unchanged even after the sharp fall in oil prices since the global recession has paved the way for a price war in the crude market and forced oil producing countries to search a way out of the expected revenue decreases.

Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel. Futures for January settlement extended losses and stood at $71.69 a barrel in London today. Prices went up this year with $115.71 in June, Bloomberg reports.

Now experts predict a further decline in oil prices, predicting that the crude market will itself manage oil supply and dictate prices. The United States expects the oil prices to decrease to $50 a barrel, at a time when Russia expects an oil drop at the level of $70-$80 a barrel.

The sharp price drop may negatively affect the oil-export-oriented economy of Azerbaijan.

Azerbaijan relies on oil for most part of its state revenue and 92 percent of export earnings. Azerbaijan based its 2014 budget on an oil price of $100 a barrel. However, in the 2015 budget approved by the Parliament on November 28, the oil price was set at the maximum price - $90 per barrel.

There has been a decline in the share of oil revenues in Azerbaijan's GDP in recent years; Oil sector provided more than 60 percent of GDP in the past but now the figure dropped to 40 percent. The government expects continuation of the declining trend in 2015. But, 35-40 percent is still a big figure, and therefore lower oil prices in the world market have a negative impact on foreign trade turnover, which eventually will lead to a decrease in oil revenues, further reducing the revenues of the State Oil Fund.

Ali Masimli, a member of the parliamentary committee on economic policy, believes that the price drop will not last for long.

“The oil prices hit $147 in mid-2008 and then in a short period of time the figure dropped to $33-35. However, the price drop didn’t last for long, and gradually the price began to rise again. I believe that even if the price is below $90, at the level of $70-$80, it will not last for a long time,” Masimli said

He added that the increase in oil prices up to $150, or its reduction to $50 can be a serious blow to the global economy, but its value at $90-$100 can increase the growth rate of the world economy.

Masimli further noted that the decline in oil prices in the world market can have a negative impact on foreign trade turnover of Azerbaijan due to the dependence of the state budget on oil revenues which is 65 percent.

"According to our calculations, if the oil price will be around $80, that is $10 below the target price, then there will be a $260 million cut in the state revenues from oil," he said.

The Azerbaijani government has recently assured that even at lower oil prices in the world market - $60 per barrel - there will be no problem with the execution of the state budget.

"Although the crude market recorded a drop in the oil price by more than 20 percent over the past three months, we don’t expect any problem in financing the 2015-state-budget expenditures. The decline in oil prices, even lower than it is now, will not seriously impact the execution of budget in 2015," Finance Minister Samir Sharifov said during discussions on the draft 2015 state budget in the country's parliament.

Sharifov said the decline in oil demand linked with the slowdown in global economic growth in the world, especially in Asia, will lead to a temporary reduction in oil revenues in exporting countries, including Azerbaijan. "This is only temporary, because there are few tangible economic reasons for a price drop in the long term,” he noted.

Even if the oil price falls to $60-$70, Azerbaijan's balance of payments will have a surplus, according to calculations by the Central Bank of Azerbaijan (CBA).

CBA President Elman Rustamov said earlier that the main indicator of a “healthy” economy is its external position. "Despite harsh global climate, external position of Azerbaijan is in its best form. For the first nine months of 2014, the country's foreign trade balance was positive. The surplus increased by about nine percent in comparison with the previous four years," he said.

He noted that Azerbaijan's exports exceeded imports by 2.7 times. Rustamov said Azerbaijan's strategic currency reserves are enough to finance a three-year importation into the country of goods and services.

Azerbaijan’s strategic currency reserves increased by $3.5 billion since early 2014 to $54 billion. In terms of the ratio of foreign currency reserves to GDP, which is 74 percent, Azerbaijan enters the list of top 20 countries in the world.

International economic institutions confirm that Azerbaijan’s large foreign exchange reserves provide the authorities with chances to overcome possible risks. In its latest report, the European Bank for Reconstruction and Development noted that although oil price is shocking and output disruptions remain the biggest challenges in the short term, large foreign exchange reserves give the authorities enough room for mitigating risk.

Diversification

Although huge volumes of oil and gas are among Azerbaijan’s current main commodities, the government strives for “economic diversification”. The country’s leadership aims at turning the non-oil sector into a locomotive of its economy. Industry, agriculture and ICT are believed to be the main pillars in the rising non-oil sector growth.

Bruno Balvanera, EBRD Director for Caucasus, Moldova and Belarus. Hungary, has recently said Azerbaijan's transition from an energy-recourses-dependent economy to an industrial oriented one makes sense in terms of sustainable development. But it also will help mitigate the impact of price volatility in natural resources.

He said EBRD's partnership strategy with Azerbaijan adopted in 2013 is consistent with the national development concept, "Azerbaijan Vision 2020: outlook for the future," whose main element is the diversification of the economy.

Keeping the import-substituting industrialization in focus, Azerbaijan actively creates industrial parks, and has already opened Sumgayit and Balakhan industrial parks, as well as Hi-Tech Park, along with investing in traditional sectors of industry.

The total volume of capital investments in Azerbaijan's industrial sector amounted to 5.35 billion manats in January-September 2014, which is 5.4 percent more than in the same period of 2013. The total volume of capital investments in Azerbaijan's industrial sector stood at 7.08 billion manats in 2013, which is 16.4 percent more than 2012.

As over the last decade, Azerbaijan has acknowledged the importance of developing its non-oil sector, the ICT sector was among the priorities and the government also announced 2013 the Year of ICT, directing its effort to develop this sector. The investments made in Azerbaijan's ICT sector and postal services in 2013 amount to 202.2 million manats (over $257 million).

Azerbaijan’s ICT sector has grown by an average of 25 to 30 percent per year over the last decade, becoming the second largest recipient of foreign investment after the oil industry.

In its latest report, EBRD noted that ICT projects implemented by Azerbaijan are helping to improve telecommunications in the whole Caucasus. “These developments will improve the quality of telecommunications throughout the Caucasus and foster the development of Azerbaijan’s space industry,” the bank believes.

The Azerbaijani government has also achieved great progress in reforming and developing its agricultural sector and improving national food security. These laid the foundation for a successful and sustainable agricultural growth.

In general, Azerbaijan has experienced a strong growth of all indicators of agricultural development in the past ten years. The total volume of production of agricultural goods increased by 3.4 times, and the volume of investment made in Azerbaijan's agriculture increased by 15 times, and the average monthly wage of workers of this sector increased by 9 times in the mentioned period.

Agriculture and food security have been among the key priorities of "Azerbaijan Vision 2020: outlook for the future". The target is to fully ensure food security and achieve self-sufficiency.

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Follow Gulgiz Dadashova on Twitter: @GulgizD

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