Coface upgrades country assessment for Azerbaijan
By Mirsaid Ibrahimzade
Coface, one of the world leaders in the field of credit insurance and risk management, has upgraded the country assessment for Azerbaijan from "C" to "B", Trend reports with reference to the company on February 7.
As noted in the company's report, “Two pitfalls for businesses in 2019: the economic downturn and political risks,” higher oil and gas prices, particularly in the second half of 2018, have lead to increases in government spending without reducing the public and current accounts surpluses.
Coface experts also note a rather high amount of reserves of the State Oil Fund of Azerbaijan (SOFAZ). The sovereign wealth fund, SOFAZ - fed by oil & gas revenues - represented 90% of GDP on October 1, 2018 (figure as of October 1, 2018). The country therefore has the means to take care of its ailing banking sector.
Speaking about the country's economic prospects, analysts of the company indicate that higher economic growth is expected in the country in 2019, and the completion of TANAP gas line will enable increased exports of gas to Turkey.
“Coface is upgrading the country assessments of oil-dependent economies with oil prices remaining at a moderate level despite high volatility: Angola (now C), Azerbaijan (B), Canada (A2), the United Arab Emirates (A3), and Trinidad & Tobago (B),” the report says.
There is dependency on hydrocarbons, but diversification efforts are underway and growth, driven by the performance of the hydrocarbon sector (44 percent of GDP and 76 percent of industrial production), should benefit from high oil prices and the development of gas production. In 2019, the country should also be rewarded for its diversification efforts with a more than 3 percent expansion in its non-oil and gas economy.
The resulting increase in income should have a positive impact on households, whose consumption (52 percent of GDP) will continue to increase vigorously. Public investment (2/3 of the total) will be directed towards the energy sector (Shah Deniz gas field in the Caspian and completion of the TANAP pipeline) and economic diversification (cotton, tourism, fruit and vegetables, as well as automotive sector with Iran Khodro), as favourable economic conditions set the stage for significant public spending thanks to increased revenues.
The revival of credit should also allow growth in private investment, which will remain mainly foreign (FDI). The contribution of trade to growth is expected to be slightly negative. Additional gas exports will only partially offset the decrease in oil exports due to well depletion, but together they will remain the main export items (90 percent).
The transfers from the sovereign wealth fund (SOFAZ) will more than cover the initial deficit of 2.5 percent of GDP. Revenue growth since 2016, first through the development of the non-oil sector, then through the recovery in hydrocarbon prices (57 percent of budget revenues) and the expansion in gas production, is expected to slow down (3 percent increase). Against this backdrop, a new fiscal rule has been adopted to reduce dependence on the oil cycle by controlling spending when prices are high. Specifically, the government has set the threshold above which additional revenue can be spent at 60 U.S. dollars, which is 5 U.S. dollars more than in 2018. Even so, spending will continue to grow at a sustained rate in 2019 (15 percent). This is particularly true of investment spending, which will represent one third of total expenditure, with current expenditure increasing to a lesser extent (under 6 percent).
Coface experts believe that the global business climate for 2019 will be determined by two major trends, namely a “cyclical slowdown” of the global economic growth, accompanied by “escalating political risk” and “persistent political uncertainties” between major players in the global arena. The automotive industry will suffer the most - trade wars and “increased competition”, among other reasons, are already forcing manufacturers to work with low profitability.
The current situation in the global economy has “contrasting effects on emerging economies”, according to the report.
On the one hand, the slowdown in growth in the eurozone (a +1.6 percent GDP growth is forecasted by Coface for 2019) and the United States (a +2.3 percent GDP growth forecasted) may slow down the growth of emerging markets due to a slowdown in the growth of world trade (Coface expects only +2.3 percent trade growth for 2019). On the other hand, the slowdown of the US economy reduces the likelihood of a rise in the US Federal Reserve interest rate, which means the risk of capital outflows from emerging markets is to be limited.
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