Despite the recent sag in oil prices, Azerbaijan's 2009 state budget is still betting big on potential oil revenues. Some analysts believe the Azerbaijani government is leaving the country exposed to a financial catastrophe by clinging to optimistic revenue projections.
The 2009 budget, approved by parliament on November 25, bases revenue projections on a $70-per-barrel oil price. Oil revenues are slotted to provide more than 62 percent of the overall budget via taxes (2.7 billion manats or $3.33 billion) on the oil sector, and via direct transfers from the State Oil Fund of Azerbaijan (4.9 billion manats or over $6 billion). Transfers from the State Oil Fund, known as SOFAZ, will increase by $1.5 billion compared with the outlay in 2008.
With world oil prices currently at $40-$50 per barrel, some local economists say the budget projections are not realistic. Other oil-producing countries such as Kazakhstan, Saudi Arabia, Nigeria and Libya have already readjusted their forecasts for the 2009 to reflect an oil price in $40-45-per-barrel range, these experts note. [For background see the Eurasia Insight archive].
Baku-based economist Natik Jafarly, head of the Society of Azerbaijani Economic Bloggers, warns that if oil prices stay at under $70 per barrel next year, the government will be forced to use additional transfers from SOFAZ to cover a ballooning deficit. The government's projected 2009 deficit is 200 million manats ($245 million) on revenues of roughly 12.2 billion manats (about $15 billion), a 16 percent increase over last year.
Already, the budget forecasts that more than half of the Fund's total assets of over $11 billion will be transferred for government use in 2009. "Additional transfers could eventually devastate the Oil Fund," Jafarly said. No statutory limits exist on transfers from the Fund; decisions are left to the president.
The Fund's revenues are drawn from whatever the difference is between the budget-projected price for oil and the actual sales price. Consequently, if oil prices stay under $70, SOFAZ will receive little additional revenue next year, he added.
Officials, however, remain confident that their projections are on target for 2009. In a November 27 interview with the state-run AzTV channel, Minister of Economic Development Shahin Mustafayev affirmed that the budget "has been prepared with a look to the possible influence of the global financial crisis on Azerbaijan." Minister of Taxes Fazil Mammadov added that the government enjoys sufficient reserves to execute the state budget "under any circumstances."
One senior executive at Azerbaijan's largest source of tax revenue, the State Oil Company of the Azerbaijani Republic (SOCAR), offered a more nuanced assessment of the situation. "Some projects [abroad] will probably be suspended" if low oil prices continue, SOCAR Vice-President Mukhtar Babayev told reporters on November 3. In recent years, SOCAR has become particularly active in Turkey and neighboring Georgia. [For background see the Eurasia Insight archive].
Meanwhile, the National Bank of Azerbaijan is taking measures to minimize the global financial crisis' impact on the local economy. Aside from direct financial aid to banks, the National Bank in 2009 will "seriously soften monetary policy to stimulate economic activity," Bank Chairman Elman Rustamov announced at a November 25 press conference.
On December 1, the bank decreased its prime lending rate from 10 percent to 8 percent -- the third such decrease since October.
Meanwhile, Azerbaijan's foreign currency reserves are declining. Since mid-September, when foreign reserves stood at $5.4 billion, National Bank data shows that about $166 million has been spent to keep the Azerbaijani manat exchange rate stable amid the precipitous decline in the oil price, and to help prop up the country's financial sector.
In mid-November, the National Bank doled out $62 million to Unibank, Azerbaijan's third largest bank, in an attempt to help the bank meet $87 million in debts owed to international creditors by the end of 2008, and an additional $116 million coming up for repayment in the first half of 2009, NBA Chairman Rustamov said.
Expert Zohrab Ismayilov, chairman of the Public Association for Free Market Assistance, a Baku-based think-tank, believes that similar rescue efforts may be needed in the near future for at least two other leading banks: the state-owned International Bank of Azerbaijan, the country's largest bank, with listed foreign debts of about $1 billion, and Bank Respublika, with $161 million in foreign debts, according to Moody's Investors Service.
Along with the banking sector, the global economic crisis has already had a negative effect on Azerbaijan's non-energy-related sectors; in particular, steel production.
All three of the country's largest steel and metal producers -- Baku Steel Company, Baki Poladtekme JSC and DHT Metal JSC -- have suspended their activities or are reportedly preparing to do so. Sales volume fell by half in November, while the prices for raw materials and finished products decreased by 20-50 percent, the Turan news agency reported on November 26, citing company managers.
The largest producer, Baku Steel Company, shut down production in early November and sent half of its 1,700 employees on unpaid leave. Baki Poladtekme JSC has also suspended steel production; the number three metal producer, DHT Metal JSC, told Turan that it will have to follow suit if the price for its products does not increase.
One of the fastest growing non-energy sectors -- real estate -- has also taken a severe hit. Apartment sales in Baku, the center of Azerbaijan's property boom, fell by 20 percent in September-November 2008 compared with June-August 2008, according to the State Real Estate Registration Service. Arif Garashov, the service's head, told EurasiaNet that prices for overall Azerbaijani properties have decreased by 10 to 15 percent since late August.
National Bank Chairman Rustamov termed the slump "a major area of concern."
Similarly, the retail car market, a prime indicator of consumer confidence, has begun to slump. The number of private cars in Baku has surged in recent years, increasing by 250 percent since 2005, according to the Ministry of the Interior.
The manager of one Baku importer of Japanese cars told EurasiaNet that banks have reduced the term of car sale loans from five years to three, while increasing the interest rate by four percentage points since August to 22-24 percent. The resulting excess supply of new cars as well as the inability of many customers to re-pay auto loans could lead to lower car prices in 2009, predicted the manager, who asked not to be named.
Shahin Abbasov is a freelance correspondent based in Baku. He is also a board member of the Open Society Institute-Azerbaijan.