Political Risk Analysis - Poor Economic Outlook To Worsen Political Risk Profile - DEC 2017


BMI View : The poor outlook on the Azerbaijani economy in light of declining oil and gas production will increase pressure on President Ilham Aliyev to push through structural reforms. However, his economic diversification plan unlikely to be fruitful over the coming years, worsening Azerbaijan's political risk profile.

Azerbaijan's political environment remains relatively stable despite the country's deteriorating economic outlook. This is mainly due to President Ilham Aliyev's tight grip over the country with little prospect for the opposition to evolve into a strong political force. Aliyev's party, the New Azerbaijani Party, has an absolute majority in parliament, keeping the legislature under his control. Furthermore, the government's reach over the country goes beyond politics. The economy is dominated by the oil and gas sector, accounting for around three-quarters of exports and 40% of government revenues. In the energy sector, Azerbaijan's state run oil company, SOCAR, takes in a dominant position, revenues of which are controlled by the sovereign wealth fund, SOFAZ. However, the rapid development of the energy sector has prevented non-oil industries such as a manufacturing base from emerging. The lack of diversification and the long-term decline of Azerbaijan's oil and gas sector raises questions over the sustainability of the country's economic model and will increase pressure on Aliyev and his government to implement free-market reforms in the years ahead.

Azerbaijan's oil and gas production is in a long-term decline. Our Oil & Gas team forecasts that crude oil production will fall from its peak in 2010 of over 1mn barrels/day to below 800,000 in 2026. Although Brent crude oil prices will recover of the coming years following the price slump of 2014-16, revenues will nonetheless rise to just USD20.3bn by 2026, well below its peak of USD37.2bn in 2011. This means that the share of energy production in the economy will decline considerably over the coming years. To offset this, the government has announced an economic diversification plan, but has done little to implement it. On the contrary, the government's decision to let Azerbaijan's largest lender, the International Bank of Azerbaijan (IBA) default on Eurobond coupon payments in August has damaged the country's reputation among international investors. This will make the process of diversifying the economy harder, as investors will be wary in investing in Azerbaijan's non-oil sector.

Oil Economy In Long-Term Decline
Azerbaijan - Crude Oil Production, 000b/d
f= BMI forecast. Source: State Statistics Committee of Azerbaijan Republic, BMI

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