CBA says Azerbaijan bracing for oil price fall
By Gulgiz Dadashova
Azerbaijan’s economy, which recorded a threefold increase, has become one of the world’s leaders in terms of development over the past ten years.
President of the Central Bank of Azerbaijan (CBA) Elman Rustamov said while discussing the draft law on "State budget for 2015" in the parliament.
Rustamov said the national economy has been stable this year. "Some thorough measures were taken in many developed countries to revitalize the economic growth. The world’s leading countries have recently normalized the situation with their budget deficit and public debt through state spending sequestration and fiscal consolidation. But as a result, economic growth dynamics sustained heavy blows,” he said.
Taking into account the tense geopolitical situation in the world, the IMF and other international financial institutions have lowered their forecasts for the economic growth of many countries, he said.
The April forecasts for the developed countries have remained at the level of 1.8 percent in 2014, while this forecast for the developing countries has been lowered. The prices for goods have dropped at world markets in 2014.
The world price index for goods has decreased by over eight percent in the first nine months of 2014. Meanwhile, the price index of food products has dropped by 8.5 percent, while the prices of metal have decreased by almost 10 percent, Rustamov said.
He further added that the oil revenues which stand in the core of Azerbaijan’s interests in terms of its macroeconomics decreased by approximately 20 percent.
“On the one hand, we see an increase in oil production of non-OPEC countries and on the other hand, the production volume drops in the main oil-producing countries,” he said. “Thus, the fall in price is resulted from the chain of demand and supply.”
Rustamov stressed that Azerbaijan adopts counter-cyclical approach to the economic analysis.
“There are pro-cyclical and counter-cyclical approaches towards the analysis in the economic practice. The economy is developing cyclically and the economic expansions alternate with recessions,” he said.
Rustamov went on to add that the pro-cyclical approach means that if today the oil price is high and the situation of a country or a financial institution is good, then it will spend a lot of money and will not accumulate reserves.
“The counter-cyclical approach means that if the oil prices are high, and a country or a financial institution gets a good income, they think about the future and are stocking up reserves,” he added. “Over the past 10-15 years, the Azerbaijani economy is using the counter-cyclical approach.”
Rustamov also said the level of savings is very high along with a large volume of financing for infrastructure projects, and Azerbaijan’s strategic currency reserves allow the government not to slow the economic development pace, given sudden changes in the oil price, and to continue to fund various projects, as well as to fulfill commitments.
He said that there are no fundamental reasons for continuing oil prices fall for a long period of time.
“One of the world's leading financial institutions, the IMF, predicts oil prices for 2015 at about $90 per barrel,” he said. “In 1998, the price of oil dropped to $8 per barrel, in 2008 the prices fell from $150 to $35 for a short period of time. And all this continued for quite a short time. In both cases, Azerbaijan has demonstrated resilience and stability of the economy. I am sure that the strong economy of Azerbaijan is ready for these processes this time as well, despite the drop in oil prices.”
Azerbaijan relies on oil for most part of the state revenue and 92 percent of export earnings.
Azerbaijan based its 2014 budget on an oil price of $100 a barrel, but the shale revolution in the United States, stagnation in the world economy, which resulted in a reduction of energy consumption in a number of countries, and appearance of new suppliers quickly underbid the prices. Although, the average price on the Azeri oil this year stood at $109, respectively, the state budget has already received more oil funds than expected.
Balance of payments
Rustamov said by late 2014 the surplus in the balance of payments of Azerbaijan will remain at about 14-15 percent of GDP.
"The surplus in the balance of payments is one of the channels of reducing public debt. Our calculations show that even if oil prices fall to $ 60-$70, the balance of payments of Azerbaijan will have surplus,” he said.
In its recent report, the Finance Ministry noted that as of October 1, 2014, the volume of the external debt of Azerbaijan made up 5, 005 billion manats, which forms 8.5 percent of GDP.
The foreign state debts of Azerbaijan made 4,753 billion manats and the ratio of the external debts on the GDP was 8.2 percent for 1 January 2014.
Rustamov further noted that the main indicator of the health of the economy is its external position. "Despite the difficult global climate, the external position of Azerbaijan today is the best. 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.
"In the first nine months of 2014 strategic currency reserves increased by $ 3.5 billion, and its volume reached about $54 billion. Even if, within three years, Azerbaijan will not have anything to export, these reserves will still allow the country to provide the necessary volume of import. In terms of the ratio of foreign exchange reserves to GDP, which is 74 percent, Azerbaijan is among the first 20 countries in the world, "he said.
Currency devolution
Foreign currency reserves that are at the CBA’s disposal have increased by more than six per cent over the past four years amounting to about $ 15 billion.
Rustamov said this figure is much higher than manat money supply in circulation. "Today, the Central Bank has the ability to convert the entire mass of manat in circulation. This is one of the solid foundations of the Azerbaijani currency stability," Rustamov said.
He noted that the Central Bank was able to ensure the stability of the manat in 2014. "The national currencies of many neighboring countries, which are our main trading partners, faced major devaluation. We have received a number of suggestions that we need to devalue our national currency, as this may create for us an advantage in relations with trading partners. But historically and scientifically it has been proven that the devaluation creates only a short-term speculative advantage, and subsequently the state and its economy lose this advantage as a result of price increases,” he said.
"It must be remembered that first of all the population would suffer from the devaluation because of high inflation, reducing cost of the assets and deposits of the population," Rustamov said.
Rustamov noted that currently the rate of manat is completely stable. "Manat presents itself as a very strong regional currency. Different states use it in trade with countries near and far abroad. We believe that by late 2015 and subsequently the stability of the national currency will be provided," he noted.
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