For more than a decade, Azerbaijan’s economy has enjoyed unbridled growth. On the 15th anniversary of it becoming one of the Asian Development Bank's member states, The Banker takes an in-depth look at its success story.  

As Azerbaijan welcomes the Asian Development Bank’s board of governors as part of the group's 48th annual meeting in May, the country's economy is at its strongest since the country gained independence in 1991, and the future is looking hopeful. The vast majority of Azerbaijan's economic growth happened after its first troubled decade of independence. In 1991, its economy collapsed and it took 14 years for gross domestic product (GDP) per capita to recover to more than $1200 – its level under Soviet rule.

Oil has been the dominating force behind the country’s resurgence. The oil and gas industry contributed $30.29bn to the economy in 2013 – which amounted to 40.87% of GDP. Although this number is still high, chart one shows that 2013 was the second consecutive year when the oil and gas industry contributed less to the economy than all other sectors combined, and the nominal GDP contribution of the sector has also decreased.

This downward trend is likely to continue in 2014 and 2015, as other sectors of the country's economy keep growing and global oversupply of oil forces down prices – at the time of writing, Azerbaijan’s fiscal break-even oil price was $95, more than $30 higher than the cost of a single barrel of Brent crude oil.

Moreover, the drastic devaluation of the manat by the country's central bank in February suggests that oil exports have been unexpectedly sluggish. This will force Azerbaijan’s economy to become less dependent on oil, and it might also act as a check on GDP growth, which has averaged 12.77% between 2003 and 2013. 

Azerbaijan GDP

Diversification drive

Oil is also the main component of Azerbaijan’s exports – in 2014, mineral fuels amounted to 93.27% of all exports. Thanks to this, the country has maintained a positive current account balance, which peaked in 2008 at 33.68% of GDP. However, this figure has been in decline since, and as can be seen in chart two, it is predicted to drop to 8.13% by 2016.

Despite the short-term hardships Azerbaijan may face as a result of falling oil revenues, there might be a silver lining in the long term. In January 2014, Azerbaijan was estimated to hold 7 billion barrels in crude oil reserves and, according to energy giant BP, its reserves will run out by 2035, necessitating a more diversified economy. Flagging oil exports might push Azerbaijan in that direction earlier.

Moreover, the country’s economy shows signs of health. As chart three shows, GDP per capita is expected to grow continuously up to 2019, when it is predicted to reach $11,674, a 235.82% increase in a decade. Prior to the manat devaluation, inflation was expected to remain steady, projected to reach 4% by 2019, bringing much-needed price stability after the wild swings witnessed in the past decade, when inflation varied from 1% to nearly 21%.

As a result of declining oil revenue, total investment is expected to only inch forward during the next five years – in the past, the government has been responsible for the majority of the investment, which it carried out using current account surplus. As that figure wanes, total investment is forecast to merely keep pace with rising GDP.

Investment interest

Due to its oil reserves, Azerbaijan has attracted a good deal of foreign direct investment (FDI) over the past decade. Chart four shows that between 2003 and 2014, it has received $30.53bn in capital expenditure from foreign investors, with more than half of this recorded in 2003.

Since then, investments have been getting progressively smaller, but better diversified. In 2003, oil and gas accounted for 69.81% of all FDI for that year, however it constituted 59.96% of all foreign investments between the years 2003 and 2014. The financial sector was the biggest recipient of FDI in 2014, having received 84% of capital expenditure.

The biggest investor in Azerbaijan between 2003 and 2014 was the UK. This is largely owing to three projects by BP in 2003, which saw combined capital expenditure of $13.9bn by the company. Russia is the next most prolific investor, having invested $2.85bn in the past 11 years. Russia has also recorded more projects than any other country, most of which have been in the financial services sector.

Azerbaijan’s top banks are profitable and in the process of becoming better capitalised. The country’s largest bank, International Bank of Azerbaijan, accounts for 44% of Azerbaijan’s total banking assets and, at $695.67m, its total Tier 1 capital reserves are more than twice the size of Pasha Bank, its nearest rival.

All of the top five banks by Tier 1 capital were profitable in 2013; however, both Pasha Bank and Express Bank earned less in pre-tax profits than the year previous. Additionally, all of the top five banks have increased their Tier 1 capital from 2012, leading in all but one case to higher capital-to-asset ratios. AccessBank was the exception to this, recording a drop of 4.56 percentage points, due to a large balance sheet expansion.

Azerbaijan economic indicators

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