Oil Market Dip Endangers Azerbaijan’s Economy

Standard & Poor’s Ratings Services (S&P) downgraded Azerbaijan’s rating as the ex-Soviet republic contends with a devalued currency and lacking revenue, according to AFP. The Central Asian country relies on oil revenue for 95% of its exports, and S&P expects the economy to shrink by one percent for 2016. Azerbaijan is located in the Caucus region near the Caspian Sea, located between Eastern Europe and Asia.

Standard & Poor’s Ratings Services (S&P) downgraded Azerbaijan’s rating as the ex-Soviet republic contends with a devalued currency and lacking revenue, according to AFP. The Central Asian country relies on oil revenue for 95% of its exports, and S&P expects the economy to shrink by one percent for 2016. Azerbaijan is located in the Caucus region near the Caspian Sea, located between Eastern Europe and Asia.

Nearly every economy that relies on energy is suffering from the price dip, and Azerbaijan is no exception. However, the country faces greater hardship than other commodity-driven nations because of the social and political unrest unraveling as the economy falters. Police throughout the Caspian country have been dispersing unruly protesters who are angry over skyrocketing unemployment and price hikes.

December 2015 became a tipping point as the central bank gave up on enhancing the nation’s currency, the manat, and the currency remains in disarray. Additionally, S&P expects inflation to rise to 15% in 2016, which is well above the traditional two percent seen in previous years.

Policymakers have addressed the challenges in various ways, but with the economy so reliant on energy exports, the government is left with few options. Officials first responded to the crisis by spending more on infrastructure projects and announcing an austerity program that would last for three years, but only time will tell if such policies will work. President Ilham Aliyev announced a 30% increase in public salaries and pensions, a dangerous promise to make at a time of low funds and public outrage. Policymakers risk stoking further unrest if they fail to deliver on their promises, which seem more likely given the current state of the economy.

The falling revenue stream has forced Aliyev to use part of the state’s oil fund to finance the budget, but the fund has already dwindled by nine percent since the beginning of 2015, placing current budget plans in peril. The positive news is that leaders have diversified the oil fund into such ventures as real estate and equity, and the government is expecting a modest level of return.

With that, the country risks losing its investments if oil prices fall below $20 a barrel, and with prices already hovering around $30 per barrel, the idea of a future lower price is not out of the question. Representatives from the World Bank and International Monetary Fund have met with Azerbaijani officials to discuss a potential $4 billion loan package to further sustain the economy.