Macroeconomic Forecast Azerbaijan

BMI View: Inflation measured 13% year-on-year in September, remaining at a high level but continuing to fall from peaks of 15.7% earlier in the year. We expect inflation to fall to 10.7% by the end of the year, as surging price growth in the winter months of 2004 has created strong base effects. Over the forecast period we see inflation remaining high (hovering around 10%), as oil revenues increase, and President Aliyev looks to boost public spending and significantly raise living standards before the 2008 presidential elections. The government's strategy of gradually allowing the nominal value of the currency to appreciate should help prevent inflation rising even further, though this might also harm the competitiveness of the non-oil sector in the economy. The main risk to our forecasts will be the government's management of the billions of dollars due to flow into the hydrocarbon industry over the next two decades. Whilst an oil fund has been established to save a large part of the revenues, the temptation to increase politically popular spending will always represent an underlying threat of economic overheating.

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