Azerbaijan Threatened with Current Account Deficit in 2020

According to forecasts of international financial institutions (IFIs), in 2020 due to the Corona Virus pandemic and falling world oil prices, Azerbaijan’s current account will be in short supply, as in the difficult years of 2015-16, but the size of the deficit can significantly exceed those years old.

ASTNA has learned from updated forecasts of the International Monetary Fund (IMF) that Azerbaijan’s current account deficit in 2020 may reach $ 3.3 billion against a surplus of $ 4.4 billion in 2019.

In 2015, when Azerbaijan suffered from falling world oil prices and two manat devaluations, the current account deficit was $ 0.22 billion, in 2016 $ 1.36 billion, and over the following years this important indicator of the country's balance of payments was surplus.

The Azerbaijani government in the budget package adopted at the end of last year predicted that in 2020 the current account of the balance of payments would be surplus and could reach $ 2.5 billion (5.2% of GDP).

However, the Corona Virus pandemic, which has reduced business activity, the volume of foreign trade operations and capital flows worldwide, negatively affected the balance of payments of Azerbaijan and its main component, the Current Account.

The IMF predicts Azerbaijan’s GDP for 2020 at $ 40 bn versus $ 47.3 bn in 2019, and the current account indicator will decrease by 8.2% to GDP against the 9.2% growth in GDP achieved in 2019.

Even in 2016, the pace of decline in the current account to GDP was only 3.6%.

Note that in the “Current Account” section of the country's balance of payments, exports and imports of goods and services, net investment income, and the net volume of certain payments are recorded.

According to the IMF forecast, in 2020, the export of goods and services of Azerbaijan may decrease to $ 14.4 billion from $ 23.6 billion in 2019, and import - to $ 15.2 billion from $ 17.7 billion in 2019.

It is clear that the decrease is mainly due to the sale of oil and gas, which accounts for up to 90% of Azerbaijan’s export operations.

Moreover, in 2020, it is expected to reduce not only the quantitative indicator of oil exports (with condensate) to 0.55 million b / d from 0.6 million b / d in 2019, but also the price (financial), as in 2019, Azerbaijani oil was trading at an average of $ 64.4 per barrel, and in 2020 this figure will be two lower.

The IMF predicts that oil GDP will fall by 2.5% in 2020, while in 2019 it showed an increase of 0.3%.

Even the increase in gas exports by Azerbaijan will not save the situation, since the sale of “blue fuel” abroad is only gaining momentum and does not exceed 10% in the country's foreign trade.

Fitch Ratings analysts also believe that the fall in oil prices will lead to a significant deterioration in the current account balance in Azerbaijan, and its deficit will amount to at least 2.8% of GDP.

According to the World Bank, due to low oil prices, the deficit of the balance of payments of Azerbaijan in 2020 will amount to 7% of GDP.

According to the forecasts of the Asian Development Bank, the import of goods by Azerbaijan in 2020 will decrease by 37.8%, since COVID-19 reduces the total volume of trade, but the cost of importing products may increase.

"Azerbaijan’s export in 2020 will decrease by 32.7%, since lower oil prices will reduce revenues from hydrocarbon exports," ADB said.

Vusal Gasimli, executive director of the Center for Analysis of Economic Reforms and Communications (CAERC), said that "changing the price of oil by $ 1 per barrel affects the current account of the balance of payments of Azerbaijan in the amount of approximately $ 250 million per year."

Gasimli noted that "Azerbaijan can maintain the balance of payments at an oil price of $ 40-45 per barrel."

BP’s Vice President for Azerbaijan, Georgia and Turkey, Bakhtiyar Aslanbeyli, relying on research from world think tanks, believes that during the second quarter of 2020, oil prices will maintain the dynamics of March-April (Azerbaijani oil was trading at $ 20-25 / barrel), and in the third quarter alone, the price of a barrel can grow to $ 30, and by the end of the year - up to $ 35.

What else affects the current account?

 According to the regular reports of the Central Bank of Azerbaijan, the impact on this indicator is: repatriation of income (mainly shareholders in international hydrocarbon projects of Azerbaijan, and in the form of crude oil), interest paid to non-residents in the portfolio of securities and interest paid for the use of foreign loans.

In this regard, it is not out of place to recall that Azerbaijan’s direct and guaranteed external debt in 2019 amounted to $ 9 billion 91 million (18.9% of GDP), but the IMF predicts it at 21% of GDP for 2020, and Fitch and S&P they also do not exclude the growth of Azerbaijan’s external debt, although they believe that the presence of previously accumulated foreign currency assets (at the State Oil Fund and the Central Bank) will help to avoid a crisis.

Nevertheless, the same IMF believes that in 2020 the CBA's foreign exchange reserves will drop to $ 4.1 billion against $ 6.3 billion at the end of 2019 “due to the Corona Virus pandemic and low oil prices.”

“According to the results of 2020, the Central Bank of Azerbaijan’s reserves will be enough to cover import costs for 3.4 months, while in 2019 there were enough reserves to cover import costs for 4.9 months,” the IMF notes.

Like it or not, the balance of payments of Azerbaijan in 2020 will be “unsweetened”.

The head of the CBA, Elman Rustamov, in April pointed to a decrease in export earnings, especially from oil exports, but joyfully reported a surplus in foreign trade for the first quarter of 2020.

Yes, in January-March, the positive balance of Azerbaijan in foreign trade amounted to $ 1.57 billion 569 million, but this happened only due to a reduction in imports due to quarantine measures in the world due to COVID-19.

Azerbaijan’s foreign trade turnover of $ 6.84 billion decreased by 10.2% compared with January-March 2019.

At the same time, exports in the first quarter of 2020 amounted to $ 4.2 billion (a decline of 6.2%), imports - $ 2.637 billion (a decline of 15.9%).

In the export structure, the bulk of the output fell to oil and gas sector products (89.8%), and this most eloquently shows the dependence of Azerbaijan, whose chances to improve the situation at the expense of other sectors of the economy in 2020 are very small.