Coronavirus (COVID-19) and low oil prices have a negative impact on virtually all segments of Azerbaijan's economy. The foreign trade balance of the republic is likely to be negative, which will lead to a decrease in the country's GDP. The revenues of the State Oil Fund of the Republic of Azerbaijan (GNFAR) and the state budget of the republic, which includes a price of $ 55 per barrel for oil, will naturally decrease. Moreover, the use of state resources in the amount of 3 billion manats to combat COVID-19 has led to increased budget expenditures. It should be noted that 34,5% of GDP in the oil sector and 65,5% in other (non-oil) sectors were expected this year. And that is hardly possible in the present circumstances for objective reasons.
Therefore, the Azerbaijani government is likely to reconsider both GNFAR revenues and the state budget in 2020. In such a situation, the Azerbaijani government, while trying to balance losses from oil and natural gas revenues, may (alternatively) lower the manat rate. Another option may be to increase foreign borrowing, which will lead to an increase in Azerbaijan's foreign debt. A report by US Standard & Poor's International Credit Agency states that, with low oil prices on the world market, in the long run, the Azerbaijani authorities, unlike in 2015, may change the manat's exchange rate against the US dollar to avoid loss of foreign exchange reserves. Standard & Poor's believes that the expected current account deficit of Azerbaijan at the level of 2020% of GDP may also lead to it. Although, according to the forecasts of the Ministry of Economy of Azerbaijan, a surplus of $ 7,5 billion or 2020% of GDP was expected in the balance of current operations in 2,5.
Below the plan
At present, oil prices on world markets have fallen below the target of the state budget of Azerbaijan for 2020. However, some experts believe that the sharp fall in world oil prices will not cause a serious strain on the Azerbaijani economy.
So, Vusal Gasimly, executive director of the Center for Analysis of Economic Reforms and Communications, told the media that Azerbaijan has immunity even at a price below $ 30 per barrel. Although oil price changes of $ 1 per barrel affect the country's current operating account at about $ 250 million a year. It should be noted that 1 barrel of BP crude is $ 15, depending on the distance, taking into account the cost of delivery contracts to the buyer. As for SOCAR, the company has previously announced that the cost of producing 1 ton of oil in 2018 amounted to 117,92 manat. This means that if the price of oil on the world market falls to $ 20 per barrel, Azerbaijan will not receive profits from oil, and if it falls below $ 20, Azerbaijan will also suffer from oil exports.
However, the new "Declaration of Cooperation" following the discussions, adopted at the 9th meeting of the Ministers of the member countries of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC + members in a video conference format, provides for stabilization of oil quotes. However, world oil prices are unlikely to rise above $ 35-40 a barrel this year. Currently, the world market price for Azerbaijani oil is around $ 25. This means that Azerbaijan's profit from oil exports will approach zero.
By the way, according to the Chairman of the Accounting Chamber (SP) Vugar Gulmamedov, the House, considering the draft state budget for 2020, pointed out the potential potential risks related to the stability of the state budget of Azerbaijan. The JV's position contains specific comments and serious warnings in this regard. According to the joint venture, the drafting of the state budget of Azerbaijan for 2020 did not consider (as in most countries, by the way) the option of changing the economic situation in the world, as well as deteriorating economic conditions for Azerbaijan.
Azerbaijan's gold and foreign exchange reserves are the only resource to minimize the losses caused by the current global economic downturn against the backdrop of the coronavirus. However, world oil prices in 2020 at $ 25-35 per barrel will not allow GNFAR to build up its reserves at the expense of current revenues. All the more so, as the current revenues of GNFAR will be demanded by the state budget of Azerbaijan.
In 2020, SNFAR is expected to receive AZN 11,350 billion from the state budget. Due to low world oil prices, Azerbaijan's state budget will receive less taxes from the oil budget, which is not a serious threat. But the problem of SNFAR is that in the current state budget of Azerbaijan the price per barrel of oil is set at $ 55.
In 2020, the GNFAR budget revenues were projected to be AZN 12,384 billion, and this forecast was calculated based on the average price of $ 55. At $ 35, GNFAR revenues will decrease by about AZN 5 billion, and the deficit will increase. This year, the estimated cost of GNFAR was estimated at AZN 11,590 billion. In other words, SNFAR will have to spend its own resources.
Another problem with GNFAR is that a significant portion of the Fund's assets are made up of US dollars. 56,6% of the GNFAR portfolio is denominated in US dollars, 31,4% in euros and 5,1% in pounds sterling. The share of the Chinese yuan in the GFAR portfolio does not reach 1%. Today there is a strong volatility of the US dollar. It should also be borne in mind that GNFAR's securities and real estate assets are falling. True, gold is rising, but GNFAR assets in gold do not offset losses.
Hold cannot be spent
Formally, the current level of Azerbaijan's foreign currency ($ 52 billion) is considered sufficient with respect to the volume of external debt in 18,9% of GDP. According to standard practice, FTAs must cover at least 3 months of future imports of goods and services. Specialists of Moody`s point out that Azerbaijan's foreign reserves are sufficient to cover 30 months of imports into the country.
Azerbaijan's FDL growth is driven by two factors: a decrease in imports and an increase in energy prices. Real inflation is rising, real incomes have fallen, the purchasing power of the republic's population has fallen, the import of imported products into the country is declining. Therefore, the natural outflow of currency from the republic has decreased. However, the spread of the coronavirus epidemic is driving global oil demand down through 2020-2021 (and at least).
According to the criteria of sufficiency of the Foreign Ministry of Azerbaijan (estimation in months of forthcoming imports and their volume relative to the amount of foreign state debt of the country), the situation seems contradictory. The repayment of both state and non-state debts of Azerbaijan creates demand for foreign currency, which means pressure on the country's foreign currency.
The international rating agency Moody`s notes that "even where foreign exchange reserves are high enough, for example, in Azerbaijan, confidence in local currencies remains fragile." Public finances and the banking system are still subject to sharp depreciation in local currency. Only the SOCAR credit debt under the state guarantee is equal to the official debt of Azerbaijan ...
According to official data, according to the results of 2019, Azerbaijan's foreign debt amounted to $ 9,91 billion, which is 18,9% of GDP, and SOCAR has a total debt of AZN 13,7 billion.
The Azerbaijani government will have to make maximum efforts, on the one hand, to increase ZRV, and on the other, to reduce the amount of public debt against the background of the spread of the coronavirus. Although oil quotes in 2020 will not remain in the range of $ 40 per barrel - not least because of the same epidemic.
Against this background, Azerbaijan's foreign debt is a major threat to the government in its intention to increase its foreign currency reserves and reduce its public debt. The progressive development of the Azerbaijani economy requires the presence of a growing volume of foreign currency, not the only but the main tasks of which are to maintain the national currency and fulfill payment obligations. It should be borne in mind that Baku is traditionally inclined to maintain a steady exchange rate of manat against the dollar.
However, with the growth of Azerbaijan's foreign reserves, foreign debt is increasing in parallel. It mainly consists of loans raised by international financial institutions for infrastructure projects and financing programs, as well as funds raised through the placement of securities in international financial markets.
CBA Chairman E. Rustamov said that should any force majeure occur, the master regulator has $ 52 billion in foreign exchange reserves and will help prevent any crisis. Obviously, E. Rustamov was referring to the joint resources of the CBA and SFAF, which are just $ 52 billion (Azerbaijan's foreign reserves are formed from the reserves of the CBA, SFAF assets and treasury funds of the Ministry of Finance). CBA foreign exchange reserves as of January 31, 2020 amount to $ 6 billion 340,8 million.
The GFAR assets presented as foreign exchange reserves consist not only of currency. According to official information, on September 30, 2019, 69,6% of the assets of SNFAR were invested in bonds and other money market funds, 13,4% in stocks, 11,4% in gold and 5,6% in real estate. As can be seen from the composition of assets, the degree of liquidity of these funds, ie. the ability to turn into real money is different. Thus, 33,1% of these assets are placed at interest for a period of 1 year. (43,3% for 1-3 years; 12,2% for 3-5 years; 11,4% for 5 years). In other words, if these assets are liquid, then LPFAR cannot use it immediately if desired. Moreover, the shocks of the global financial market can depreciate these assets, ie. the stock price may fall, real estate (as well as gold) can be depreciated.
Direct and indirect factors
China is one of the main foreign economic partners of Azerbaijan. Although Russia and Turkey occupy a major position in imports to Azerbaijan, according to the latest data, China accounts for 11%. In other words, out of goods coming to Azerbaijan for 100 manats, 11 manat falls on China. Much (almost everything from clothing to electrical engineering) is imported to Azerbaijan from China. Trade restrictions with China are sensitive, both directly and indirectly.
Azerbaijan's exports in January 2020 amounted to $ 2,1 billion, an increase of $ 851 million or 66,5% compared to the same period of 2019. Imports for the reporting period were $ 720 million, down $ 304 million, or 29,7%, compared to the same period in 2019. In January, we have an increase in exports while reducing imports. As a result, in January this year. a positive trade balance of $ 1,4 billion. It should be noted that neither China nor Iran were in the top ten of Azerbaijan's total exports in January. These countries are leading in imports. For example, in January 2020, China imported $ 114 million worth of goods into Azerbaijan and $ 24 million worth of Iran.
(Official data for 2019 show that Azerbaijan exported $ 752 million worth of goods to China and $ 1,4 billion in imports from China to the Republic. In 2019, Azerbaijan exported $ 41 million worth of goods to Iran and imports from Iran to the country In other words, in 453, 2019% of Azerbaijani imports came from China and 10,48% from Iran.)
The direct effect is that imports from China are now banned or restricted due to a pandemic. Against the background of the dominance of Chinese goods in Azerbaijan's imports, this leads to a deficit and a rise in prices. The indirect effect is that with the outbreak of the epidemic in different countries at their peaks and in the course of the epidemic, oil prices will not rise (at least, and even they will fall). China, as the largest importer, is interested in low oil prices…
The spread of the coronavirus in the neighboring countries of Azerbaijan, namely Russia, Turkey (the main importing countries of Baku) and Iran - also leads to a negative foreign trade balance. Russia and Turkey have at times reduced their ties with China, closed their borders, and so on. Most of Turkey's raw materials are also imported from China. In the event of a sharp decline in Azerbaijan's trade and economic relations with China, the Turkish market is unable to fully secure Azerbaijan. Due to limited ties with China, Turkey itself will face a trade deficit and demand will grow.
If current trends in Azerbaijan's trade with its traditional long-term counterparts are adopted, the situation could have extremely negative consequences for maintaining macroeconomic stability in the country.
In particular, the problems and negative impact of coronavirus in Iran on the economy of Azerbaijan can be divided into several groups. First, it is tourism. Tourism between China and Azerbaijan is at an early stage of development. However, in 2019, the number of arrivals from China increased by 62,4%. In 2019, only 25500 people came to China from Azerbaijan.
According to the State Border Service, 2019 3 170 foreigners and stateless persons from 400 countries arrived in Azerbaijan in 193. 8,1% or 257 people were Iranian citizens. In 2019, the number of Azerbaijani citizens traveling abroad was 5567700, of which 36,7%, or 2043000, visited Iran.
This means that, on average, 21417 Iranians came to Azerbaijan every month, and 170250 Azerbaijanis visit Iran. The closure of the borders has nullified these tourist flows. It is important that the number of travelers from Azerbaijan to Iran for treatment, shopping and job creation has been nullified. Due to the situation in Iran, the flow of tourists from Arab countries to Azerbaijan and so was small. As a result, business opportunities in the tourism sector will significantly deteriorate in Azerbaijan.
Secondly, prices for Iranian, Russian and Turkish goods will objectively increase in the near future. It's about agricultural products, food and essentials. In these countries themselves, there is already a process of stagnating economies and a corresponding internal deficit.
Third, investments. Azerbaijan has registered Iranian and Russian companies in the fields of industry, construction, services, communications, trade, transport, agriculture and other segments. The current situation around Iran, Russia and Turkey has a negative impact on the investment climate in Azerbaijan.
Fourth, transportation. Transit freight passes through the North-South ITC to Iran and back to Russia; Baku - Tbilisi - Kars (BTC) railway. Disruptions in cargo transportation reduce Azerbaijan's transit revenues.
Fifth, the budget. The deterioration of trade, investment, tourism and transport links between Azerbaijan, Iran, Russia and Turkey is also affecting the state budget revenues from these sectors. In particular, tax and customs payments will fall into the budget of the country's non-oil sector.
In case of significant deterioration of Azerbaijan's trade and economic relations with Russia, Iran and Turkey amid falling world oil prices, manat devaluation will become inevitable. Foreign direct investment in Azerbaijan is declining. In addition, the devaluation of the national currency of Azerbaijan's main trading partners increases pressure on manat.
The "red line" for the price of oil in the state budget of Azerbaijan is $ 40 per barrel. The official statement of the Ministry of Finance of Azerbaijan on the state budget for 2020 is the biggest risk of falling world oil prices. As 52,7% of Azerbaijan's state budget revenue is generated by oil profits, current oil prices will directly affect the country's state budget revenues. For example, at a barrel price of $ 40, budget revenue will decrease by 16%.
Against the background of the lack of real diversification of the country's economy, the problem of linking the growth of foreign currency reserves and external debt in the short term is not solved. An important feature in servicing Azerbaijan's public debt is the lack of its own foreign exchange revenues of the state budget for servicing and repayment of foreign debt. The issue of attracting foreign loans by the Azerbaijani government, at least for lending, will remain relevant in the coming years.
Growth of Azerbaijan's total foreign debt may lead to a deterioration of the macroeconomic environment, in particular, slowdown of growth and depreciation of the national currency; lack of access to government debt refinancing; approach of peak payments on the debts of state-owned companies.
Rauf Rajabov, Orientalist, Head of Analytical Center 3RD VIEW, Baku, Azerbaijan