Page 43 - bne Magazine Apri20

bne April 2020 Cover story I 43
the economic crisis brought about by the disease outbreak could be devastating for its hydrocarbon-export economy. Another big coronavirus issue in the country is how autocrat Ilham Aliyev appears to be quite blatantly using the emergency to further crack down on the country’s already severely repressed opposition groups. For those Azerbaijanis struggling to enjoy their Nowruz spring New Year holidays amid the pandemic, there were probably mixed feelings on March 26 when the ex-Soviet country extended the holidays until April 4, from the previous end date of March 29, due to the coronavirus outbreak.
Officials, meanwhile, will no doubt spend coming days fretting over how to counter the ill effects caused by
the oil price crash associated with reduced world
energy demand brought about by the downturn radically exacerbated by the pandemic (and Saudi Arabia and Russia failing to reach a deal that would pave the way to an OPEC+ agreement on scaling down oil production). According to IMF data, Azerbaijan needs an oil price
of around $53 per barrel to balance its budget. Oil is presently trading at around half that.
It’s still far from clear how Azerbaijan will balance its books in the wake of the oil price crash. A big difficulty is that last year Azerbaijan increased pensions and other social services to ease the pain of inflation and address rising discontent. Back then, Aliyev said the spending would be partly paid for with higher customs revenues, consumer spending (via a value-added tax) and an expected uptick in tourist arrivals. But these returns are now expected to fall. If the Aliyev administration decides not to risk unrest by cutting social payments – which make up nearly 65% of the state budget, it might have to look at cutting the investment and defence budgets. But defence usually gets ring-fenced given the standoff with neighbour Armenia over Nagorno-Karabakh.
The huge slump in tourism the pandemic is set to bring about will also deal a heavy blow to Azerbaijan. The sector is a major contributor to its GDP, accounting for around 15% of economic output.
On the political front, Aliyev recently threatened to “isolate” his political enemies during the crisis and talked of a “fifth column” within the country. “A state of emergency might be declared sometime,” he said in a statement. “In this case, isolation of the representatives of this fifth column will become a historical necessity... We cannot allow the anti-Azerbaijani forces, the fifth column, national traitors, taking advantage of this situation, to commit any provocation.”
PUBLIC HEALTH MEASURES
• The government tightened its quarantine rules on March 27. It has banned walking in parks and boulevards as well as the movement of vehicles between regions and cities, while the operating hours of Baku’s metro system has been limited to five hours a day.
• The land borders with Iran, Russia, Georgia and Turkey have been closed. The border with Armenia has long been closed after Baku broke off diplomatic relations with Yerevan over the Nagorno-Karabakh dispute.
• Police have been patrolling streets in the cities by car, using loudspeakers to ask people to stay at home.
• Formula One’s Azerbaijan Grand Prix, which was scheduled for June 7, has been postponed. The race takes place in the streets of Baku. The scrapping of the showpiece means that Baku will not have any major sporting event to host this year. It was chosen as the location for four games of the Euro 2020 football championship but that will now take place in 2021.
ECONOMIC MEASURES
• After the last oil crash, in 2014, Azerbaijan devalued the manat twice. Some analysts think that this time around Baku will manage a softer slide in the value of the manat by spending hard currency reserves, but they worry about a run on vulnerable banks in the banking system that Azerbaijan has spent the last few years stabilising. The central bank may only have the reserves to manage the manat for a few months.
ECONOMIC FORECASTS (where available)
• Fitch Ratings said on March 24 that the economic pressures resulting from the COVID-19 pandemic and lower oil price were credit negative for banks in Russia and neighbouring markets including Azerbaijan, and could result in negative rating actions. It revised banking sector outlooks to negative for Russia, Azerbaijan, Ukraine, Kazakhstan, Armenia, Belarus and Georgia.
• “Corporate asset quality will weaken across the region due to the drop-off in economic activity and high loan dollarisation (albeit less so in Russia) as exchange rates come under pressure,” Fitch warned. “This will add to still sizeable legacy problems in some markets, in particular Ukraine, Kazakhstan, Belarus and Azerbaijan.”
www.bne.eu