A long road ahead for Azerbaijan’s recovery

Unlike Russia and Kazakhstan, which will see a return to growth in 2017, Azerbaijan will continue to struggle next year, with the economy barely seeing stagnation after contracting by 4%YOY in 2016. The country will continue to deal with deeper manat depreciation while government spending will decline even further in 2017. MNCs should maintain conservative targets for 2017, anticipate a weaker manat, prepare for more operational challenges and expect a return to stable growth only in 2018, when the economy will then see 1-2% YOY growth through 2020.

Weaker manat: Central bank reserves have fallen drastically as a result of the oil price collapse in late 2014, limiting the government’s ability to support the manat. As a result, the manat was devalued twice in 2015 and further weakened in 2016, falling by about 15% since the beginning of the year. The manat will continue depreciating into 2017, forecast to average 185 to the US dollar, a 15% depreciation from the 2016 average rate. Inflation, which has been above 10% throughout 2016, will moderate in 2017, but remain elevated and worsen the already-high levels of consumer indebtedness, limiting improvements in the weak consumer and business confidence.

Lower government demand: In terms of public demand, the government has formed a conservative 2017 budget based on an oil price of US$ 40/bbl and is committed to cutting spending, which will fall by 5% YOY in nominal terms. Expenditure on public capital investments, defense, and healthcare are targeted for cuts, in particular.

Operational challenges: Firms also need to factor into their 2017 plans increased regulatory changes in the market that raise pressure on their business. The government has instituted an import substitution policy that increases customs duties on certain products, as well as some tax increases. In addition, the wholesale and retail prices of electricity were raised in mid-2016 (by 5% and 17%, respectively, though from low bases) and will increase each year until 2022. Other unspecified tax increases are expected in 2017 as the government struggles to support spending. Meanwhile, local businesses are suffering from high indebtedness and elevated interest rates, both of which will reduce their financial capacity throughout the year.

Most firms have deprioritized Azerbaijan in their CIS (Commonwealth of Independent States) portfolio in light of the extended economic downturn. Still, companies with a more strategic vision for the market may want to consider getting ahead of the competition in their sector in 2017. The country still enjoys relatively high spending capacity within the region and is highly urbanized, making the addressable market substantial. Politically, President Aliyev is popular and maintains tight control of the country. Although protests have been more frequent, they will not present any significant political threat to the country.

Amid the weak demand, firms in 2017 should focus on demonstrating the value of their product to particularly price-sensitive customers in this environment. In both the public and private sector, MNCs should seek out niche opportunities where possible: anecdotal evidence suggests some opportunities have appeared in different customer segments or in areas where the competition has left or is struggling to compete.

FSG clients can access our Azerbaijan Market Spotlight for a deeper analysis of the country’s outlook for 2017. Not a client? Contact us to learn more.

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