Azerbaijan Country Risk Report Q2 2019
Azerbaijan's economy began its gradual recovery in 2017, and we expect this modest pick-up to continue over the coming quarters due to an expansion in natural gas production, coupled with a rise in investment in the non-oil sector due to the government's improved ability to spend as oil prices rise gradually. Therefore, we forecasting real GDP growth to rise to 0.8% in 2018 (compared with 0.1% in 2017) and 1.3% in 2019.
However, the government's plan to significantly diversify the economy will not bear significant fruit due to a lack of structural reform momentum. Long-term growth will thus remain tepid relative to historic trends, averaging 3.9% over our forecast period to 2028.
Despite relatively low oil prices, public finances will remain stable on the back of sovereign wealth fund reserves of over 92.0% of GDP.
We continue to expect Azerbaijan's political outlook to be weak, which is reflected in our short- and long-term political risk scores of 62.9 and 49.8 (out of 100) respectively. The ongoing dispute with neighbouring Armenia regarding the Nagorno-Karabakh region will continue to pose the largest threat to Azerbaijan's external security. President Ilham Aliyev's strong grip on power will likely ensure policy continuity, but will come at the long-term expense of democracy and economic development.
A major downside risk stems from another oil price crash, resulting in deteriorating public finances and further cuts in capital expenditure. This would halt Azerbaijan's economic recovery and likely cause another recession.
The banking sector remains weak, and continued weakness could weigh significantly on credit growth and economic activity.
Escalating tensions with neighbouring Armenia can quickly result in an all-out war between the countries.Azerbaijan Country Risk
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