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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 BAKU INTERBANK CURRENCY EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment It is expected that Mr. Aliyev will continue to consolidate his position over the forecast period, by sidelining potential rivals and placing loyalists in positions of power. Azerbaijan's growing oil wealth will enable Mr. Aliyev to increase expenditure on wages and infrastructure–thereby allowing him to claim that he is distributing the benefits of the oil boom. Azerbaijan will continue to balance its foreign policy orientation, seeking to maintain stable relations with the West at the same time as developing military and economic ties with Russia and keeping relations with Iran on an even keel. Prospects for a resolution of the conflict with Armenia over the disputed region of Nagorny Karabakh have receded, following the failure of presidential talks in February 2006 to reach consensus over a framework peace agreement. Further progress is unlikely in the forecast period, given the approach of a parliamentary election in Armenia in 2007 and presidential elections in both countries in 2008. Economic policy will focus on the challenge of maintaining macroeconomic stability during a period of rapid economic growth. Budgetary spending on welfare and infrastructure projects will rise, with the aim of alleviating poverty (particularly among those displaced from Nagorny Karabakh). In conjunction with a large increase in foreign-currency inflows from oil exports, the rise in government spending risks sparking an acceleration in inflation. Official debt, both domestic and external, will remain low, but the issuance of domestic debt will increase as a way of mopping up excess liquidity linked to hard-currency inflows. Greater reliance on hydrocarbons resources will adversely affect the structure of Azerbaijan's economy. Together with increasing concerns about the business environment, the weak banking sector and poor legal framework, the growing dependence on hydrocarbons will exacerbate the differences between the oil and non-oil sectors. Economic Performance A surge in hydrocarbons output will support Azerbaijan's economic expansion in 2006-07. Production came on stream at the Azeri- Chirag-Guneshli (ACG) oilfields in February 2005, and crude oil has now filled the Baku- Tbilisi-Ceyhan (BTC) export pipeline, with the first tanker leaving Ceyhan in early June. Crude oil production will increase steadily over the next few years, reaching just under 1m barrels/day by 2007. Gas from the Shah Deniz field is expected to come on stream in September-October 2006, which will provide a further boost to economic growth. The main factors fuelling consumer price inflation will be the rapid growth in budget expenditure and continued strong foreign exchange inflows associated with the oil and gas sector. Robust private consumption, owing to sharply rising wages in the oil and oil-related sectors, will also exert inflationary pressure. In response, the authorities will tighten monetary policy slightly and will allow the manat to appreciate. However, because of the dominance of foreign currency in the money supply, and a continuing lack of public confidence in the manat, the strengthening of the local currency will have only a limited impact on inflation. We therefore expect annual average inflation to remain at around 6.5% in 2006-07, although the lack of monetary policy tools available to the authorities could result in a somewhat higher rate. Hard-currency inflows from oil exports will strengthen the manat in both nominal and real effective terms over our forecast period and beyond. The National Bank of Azerbaijan (NBA, the central bank) will attempt to sterilize foreign-currency inflows through the sale of Treasury bills and the use of Azerbaijan's overseas oil fund, the State Oil Fund of the Republic of Azerbaijan (SOFAZ). However, the amount of short-term paper involved will be small. As Azerbaijan's rate of inflation will remain high compared with those of its trading partners, this will produce a real effective appreciation of around 10-15% between end-2005 and end-2007. Nevertheless, the manat will still be some 15% weaker in real effective terms than its rate in 1997. This will mitigate the impact of the real effective appreciation on the export competitiveness of Azerbaijan's non-oil sectors.* * The Economist Intelligence Unit Ltd., July 2006 Key Information Contacts National Bank www.nba.az State Committee for Securities www.scs.gov.az Ministry of Finance www.maliyye.gov.az National Depository Center www.mdm.az Ministry of Economic Development www.economy.gov.az 2003-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2003-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Agriculture Industry Construction Transport & communications Other Public consumption Gross fixed investment Private consumption Net exports of goods & services 49.9 12.1 10.6 13.1 14.3 70 60 50 40 30 20 10 0 -10 -20 -30 11.7 63.2 50.8 -24.0 PAGE 48
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 BAKU INTERBANK CURRENCY EXCHANGE AZERBAIJAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP at market prices (Manat billions) 5.3 6.1 7.0 8.5 11.9 GDP (US$ billions) 5.7 6.2 7.1 8.7 12.6 Real GDP growth (%) 9.9 10.6 11.2 10.2 26.4 Consumer price inflation (av; %) 1.5 2.8 2.1 6.7 9.6 Population (millions) 8.1 8.2 8.3 8.3 8.4 Exports of goods FOB (US$ millions) 2,078.9 2,304.9 2,624.6 3,743.0 7,649.0 Imports of goods FOB (US$ millions) 1,465.1 1,823.3 2,723.1 3,581.7 4,349.9 Current account balance (US$ millions) -51.9 -768.4 -2,020.9 -2,589.2 167.3 Foreign exchange reserves excl gold (US$ millions) 896.7 721.5 820.9 1,089.6 1,191.6 Total external debt (US$ billions) 1.3 1.5 1.7 1.7 (b) 1.9 (b) Debt-service ratio, paid (%) 5.5 6.3 7.9 6.7 (b) 4.1 (b) Exchange rate (av) Manat:US$ 0.93 0.97 0.98 0.98 0.95 KEY INDICATORS 2005 2006 2007 2008 2009 2010 Real GDP growth (%) 26.4 32.5 16.1 10.2 7.1 6.4 Consumer price inflation (av; %) 9.6 6.6 6.9 4.7 3.5 3.0 General government balance (% of GDP) 0.6 0.3 0.2 0.0 -0.6 -1.0 Current account balance (% of GDP) 1.3 22.6 41.2 38.2 30.2 25.8 Exchange rate Manat:US$ (av) 0.95 0.89 0.85 0.81 0.77 0.74 Exchange rate Manat:[euro] (av) 1.18 1.13 1.14 1.05 0.97 0.92 2005-PRINCIPAL EXPORTS (%) 2005-PRINCIPAL IMPORTS (%) Oil products Transport Food industry Chemicals Metals Other Machinery & equipment Metals Food products Oil products Transport Other 76.8 7.5 3.3 3.0 2.4 7 33.3 11.9 11.6 10.6 10.0 22.6 2005-MAIN DESTINATIONS OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Italy Turkey France Russia Turkmenistan Other Russia UK Singapore Turkey Other Kazakhstan 30.3 9.4 6.6 6.3 17.1 9.2 9.1 7.4 6.3 6.1 41.1 51.1 Source: Economist Intelligence Unit ViewsWire (a) Actual. (b) Economist Intelligence Unit estimates. (c) Data reflect the redenomination of the manat on January 1st 2006 PAGE 49
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