Our Analytics 22 june — 10:35

Azerbaijan's Central Bank predicts surplus for the first half of the year (Our comment)



It is no secret that the Central Bank of Azerbaijan systematically monitors enterprises in the real sector in order to adjust its monetary policy in connection with the real situation. And the latest monitoring by the Central Bank shows that the index of business confidence in the non-oil industry (the oil sector is mainly controlled by a consortium of foreign companies and operates according to special rules), construction, trade and services in May were in the negative zone.

The Central Bank notes that the negative impact of the pandemic on domestic economic activity in Azerbaijan continued in May-June, there was a decline in all components of aggregate demand. At the same time, the country's main bank notes that statistics show a good reaction of the country's government to external shocks. Indeed, the retail trade turnover for the first five months decreased by 1.7% compared to the same period last year. In particular, the cost of paid services provided to the population fell by 14.9%, and the volume of investments in the non-oil sector decreased by 16.7%. But, despite this, official statistics for the five months of this year show that economic growth in the basic sectors of the economy (oil and gas and agriculture) continued.

At the same time, the full implementation by the government of its obligations on social expenditures, the program for supporting business and the population under the conditions of COVID-19, and other measures prevented an even greater decline in economic activity, as well as partially offset the losses of business entities. In addition, although the export volume for the first five months of this year decreased by 19% compared to the same period last year, the foreign trade balance remained surplus. The decline in imports has a regulatory effect on the foreign trade balance, and it is possible that in the first half of the current account of the balance of payments will be in surplus.

As we noted earlier, the current account surplus of the balance of payments of Azerbaijan for the first quarter of this year amounted to $643.6 million, a decrease of 2.5 times compared to the same period last year. The average oil price in the first quarter was $57.6 per barrel, compared to $61.9 a year earlier. Amid the OPEC+ deal, oil prices began to recover. Since early June, the average price of Brent crude oil has already reached $40 per barrel, which is 23% higher than the average price in May ($32.5 per barrel) and 48% higher than the price in April ($27.1 per barrel). Azerbaijan's exports decreased by 19% compared to the same period last year. But at the same time, there was a surplus in foreign trade, and there was also a tendency to reduce imports. Taking into account all these factors, the Central Bank did not rule out that in the first half of the year we will also see a surplus in the current account of the balance of payments.

At the same time, all this did not prevent the Central Bank from lowering the discount rate from 7.25% to 7% for the first time this year, reducing the cost of the manat for business and the public (the lower threshold of the interest rate band was reduced from 6.75% to 6.5%, and upper - from 8% to 7.5%). Thus proving that it does not intend to wait idly for mercy from fate, but holds the situation in its hands. Therefore, it strictly adheres to the schedule for considering the discount rate parameters approved at the end of 2019 (8 times a year), although it takes great care because of the difficult economic situation, preferring not to rush into decisions on its changes. So, if last year the Central Bank reduced the discount rate by 25 basis points 8 times in a row - from 9.75% to 7.5%, then this year this indicator is almost six months old.

According to analysts of the Russian Gazprombank, caution in the actions of the Central Bank is the actual recognition of the factors that slow down the country's economy, in which inflationary processes also slowed down. Over five months, the country's GDP in the context of falling hydrocarbon prices and the introduction of restrictive measures in connection with the pandemic fell by 1.7% compared with an increase of 2.2% over the same period last year. At the same time, the decline in non-oil GDP, the most sensitive to the availability of credit resources, depending on the discount rate, amounted to 2.1%, while over the same period last year it grew by 2.4%.

But, as they say, there is a silver lining. The Central Bank made the decision to lower the discount rate, taking into account the reduction in annual inflation and maintaining stability in the foreign exchange market, improving the international environment, weakening consumer demand and its impact on inflationary expectations. And inflation is slowing down - in May, deflation was recorded at 0.5%, and annual inflation was 2.9%. Amid the pandemic caused by the uncertainty, a reduction in aggregate demand with a decrease in consumer and investment spending acts as the main reducing factor. The seasonal reduction in prices for agricultural products and the continued decline in world food prices (-10.5% for five months) also affect indicators. According to updated forecasts, the most probable inflation by the end of the year will be 3%-3.5% - within the framework of the current macroeconomic policy, being within the target range (4% ± 2%). And, of course, the stable manat rate, which the Central Bank maintains despite all the critical attacks of the expert community, also helps to curb inflation.

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