Channels of the impact of coronavirus on our economy

I wanted to write about the indirect effects of coronavirus on Azerbaijan. I did not think it was right to classify the effects of the flu as so global. Due to the current situation, it cannot be right to consider coronavirus as an internal problem of China. The virus has begun to contain a large number of political, economic, environmental and other risks in itself by stopping being a social problem. It has already turned into a megatrend. Because it has crossed our borders. GDP is shrinking around the world. Its economic effects have begun to cover a wide geography.

After all, Azerbaijan closed and restricted land borders with other countries, except the Islamic Republic of Iran. So, the problem has also become our problem.

Megatrends in the global economy

As you know, China is the world’s second-largest economy and a leading trading country. Therefore, the economic downturn caused by coronavirus poses risks for global growth. Economists participating in the survey of “Reuters” predict that China’s 6 percent economic growth, recorded in the previous quarter, is expected to fall to 4.5 percent. This forecast rate of decline also suggests that it will have more serious consequences than the 2008 financial crisis.

Possible channels of influence on the economy of Azerbaijan

• Oil demand will fall and prices will go down. China is the world’s largest oil importer. Global oil demand will decline due to the complex closure of the Chinese economy. Oil demand is expected to decline by 435,000 barrels compared to the first quarter of 2020. This also allows predicting there will be a sharp drop in oil prices too. Oil prices in the world market have fallen to $ 51 today. At the same time, Azerbaijan will produce 5.3% less oil this year than last year. Both the decline in prices and oil production will reduce our oil revenues.
• There will be fiscal risks. One barrel of oil was taken as $ 50 in this year’s state budget. If the rapid drop in oil prices is likely to continue to drop by summer, there will be a possibility of applying the budget sequester, which will make it necessary to adjust the budget parameters. As a result, there will be created financial tension in the budget-tax sector through the indirect impact (tax burden) of oil on budget revenues. Problems such as the closure of the budget deficit and the reduction of expenses will occur.
• Revenues of the State Oil Fund will be lower than forecast. Oil prices will directly affect $ 91 out of each $ 100 that we export. On the other hand, it will not remain unaffected in the price of gas we sell. In other words, with a greater proportion of gas prices - about 40 percent, our revenues will decline. Hence, this means that there will be a reduction in the cumulative revenues of oil and oil products we export.
• Assets of the State Oil Fund will “melt”. The process of depreciation of assets intensified in the world currency and securities markets. $ 6.7 billion of SOFAZ’s $ 42 billion assets are placed on bonds and other money market tools. Our stocks will not remain unaffected from the fall in securities on the world market. This is the most important thing among the channels that affect our reserves.
• We will also have losses in the currency basket of the State Oil Fund. The dominance of the SOFAZ’s currency basket is linked to US dollar savings. However, there is a small portion of the assets held in 35% of the euro and 1.7% of the Chinese, which will make currency decline inevitable after the devaluation of the euro and the yuan. There will be a reduction in SOFAZ’s reserves in this currency basket.
• Monetary impact channel. In January, supply exceeded demand for the foreign currency sale of the State Oil Fund. Compared to the previous months, the SOFAZ sold $ 240 million less on the foreign exchange market. The decline in dollar demand resulted in a decrease in the demand for dollars for imported goods during this month. Its main import channel is due to the strict ban on goods imported from China. 10 percent contraction in the imports has declined the demand for the dollar. This may cause concerns in the foreign exchange market.
• Price increases in the consumer market will be a source of social tension. The possibility of Azerbaijani economy’s being blockaded is growing, especially after having customs relations only with Iran among the nearest neighbors, which seems too risky against the backdrop of production opportunities that will provide domestic consumption of our country. This means that the dominance of the tendency related to becoming more expensive in the country’s economy will be inevitable. There will be an increase in prices for both food and non-food products. Because of the breakdown of relations with the three countries (Turkey, Russia, China) from where most imports come, it can be considered a source of social tension.

The main threat of the spread of coronavirus to our country is the neighboring Islamic Republic of Iran. The borders with this country should be closed until the summer (this disease will not be so severe during the summer months). Iran indeed is one of the main trade partners of Azerbaijan. Our trade turnover with this country is $ 446 million. Of this, $ 405 million falls on imports from Iran to Azerbaijan and $ 31 million to exports from Azerbaijan to Iran. This risk is not worth due to nearly half a billion dollars turnover. It is possible to turn mainly to the Turkish market to compensate for the food and agricultural products. Changes can be made to the geographical distribution of consumption to minimize impacts. If the scale of this disease spreads to our country a little bit, our inadequate healthcare system can reveal its undreamed weakness in the face of it. For preventive measures, it is necessary to close the land borders with Iran. The border closure with this country will have negative economic effects but the temporary economic problems are nothing in comparison with the devastating effects of this coronavirus.