Macroeconomic Forecast Azerbaijan

Soaring oil production and exports continue to drive the economy above expectations, potentially pushing real GDP growth above 20% in 2005. While we currently estimate 19.1%, we believe the risks are weighted heavily on the upside, as early indicators measure growth in oil production and exports at 40.5% and 41.5% respectively in the first 11 months of 2005. With the Baku-Tbilisi-Ceyhan oil pipeline set to expand capacity throughout the next year, and a major gas pipeline also scheduled to open in the next 12 months, these trends should continue, leading us to forecast GDP growth at 21.7% in 2006. While we currently consider this to be the peak of the economic expansion in our short-term forecasts, growth, driven by the hydrocarbons sector, will continue at a booming rate until the end of the decade. Obviously, given the dominance of the energy sector in the composition of our growth forecasts, exposure to the global price of oil and gas represents the main risk to the economy. However, as we do not expect a crash in the value of either commodity, this risk remains relatively minor

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