Azerbaijan Country Risk Report

Azerbaijan’s high dependence on the hydrocarbon sector and global oil and gas prices has resulted in low and volatile GDP growth since 2011, with an annual average of less than +2% since 2010. Looking ahead, GDP growth is expected to average around +3% in 2024-2025, driven by strong performance in the non-hydrocarbon sector, while inflation is forecasted to stabilize at 3.5%. Persistent risks include a potential correction in the manat's overvaluation and volatility in hydrocarbon markets.

The economy rebounded strongly in 2024, with real GDP growth estimated at +4.5% thanks to robust activity in the non-hydrocarbon sector and a recovery in hydrocarbons. The non-hydrocarbon sector expanded by +8% in 2024. Key growth drivers included construction (+19%), transport (+17%) and hospitality (+15%), while agriculture grew by just +0.7% due to unfavorable weather conditions. The hydrocarbon sector’s value-added rose +7% in September, supported by a +5% increase in natural gas production. Crude oil output saw mixed performance, with production levels rising slightly from mid-year but remaining 4% below 2023 levels. Our current oil price forecast for 2025 remains slightly superior to the fiscal breakeven, which the IMF puts at USD73 per barrel, up from USD55 in 2023.

On the demand side, investments declined by -3%, reflecting weaker public and private sector spending. Non-hydrocarbon investments contracted sharply by -33%, attributed to reduced public sector allocations, while hydrocarbon investments dropped -40%, following the completion of major projects in 2023. Exports fell -24%, primarily due to a -29% decline in the value of hydrocarbon exports, driven by lower crude oil volumes and a significant drop in natural gas prices. In contrast, non-hydrocarbon exports grew by +27%, supported by increased shipments of polymers and cotton. Imports surged +24%, largely due to public sector activity, including reconstruction efforts and preparations for the United Nations Climate Change Conference (COP29) of November 2024. The manat (AZN) exchange rate remained stable at AZN1.7 per USD1, backed by interventions from the Central Bank of Azerbaijan and the State Oil Fund (SOFAZ), whose assets rose +10% to USD61.6bn by October.

Political risks in the Caucasus region remain high. President Ilham Aliyev secured a fifth term in a February 2024 snap election, which, along with a parliamentary election brought forward to September, had limited opposition participation. His New Azerbaijan Party retained its parliamentary majority. Azerbaijan's territorial ambitions, including plans for the Zangezur corridor linking its mainland to the Nakhichevan exclave, remain a flashpoint in its relations with Armenia. While a peace agreement is a stated priority, lasting resolution is unlikely in the near term. Meanwhile, Azerbaijan is expanding its alliances, including renewing ties with Russia, advancing oil agreements with the EU, collaborating with Türkiye on regional connectivity and normalizing relations with the Taliban to unlock new markets in South-East Asia.

The structural business environment in Azerbaijan remains weak, with persistent issues in regulatory quality, the rule of law and control of corruption. Governance challenges are underscored by Azerbaijan's decline in the Heritage Foundation’s Index of Economic Freedom and its poor performance in our proprietary Environmental Sustainability Index due to shortcomings in renewable energy, water management and recycling.