ING: $10 Rise in Oil Prices to Add 2-4% to Azerbaijan's GDP

According to a report by the Netherlands-based ING Group, every additional $10 per barrel of oil can increase Azerbaijan's annual exports by 2-4% of GDP.

"Azerbaijan is in a more stable position: high oil prices strengthen the country's financial reserves, and the manat's peg to the dollar limits imported inflation. Since consumer price inflation is within the target range of 4% ± 2%, we expect the key rate to remain at 6.50%," ING said.

Overall, ING Group's baseline scenario for interest rates and currencies in the CIS-4 countries (Azerbaijan, Armenia, Kazakhstan and Uzbekistan) remains positive and is determined primarily by domestic factors.

According to ING estimates, each additional $10 per barrel increase in oil prices could boost annual exports of Azerbaijan and Kazakhstan by 2-4% of GDP. At the same time, the impact on the currency market is limited by the fixed exchange rate in Azerbaijan, as well as Kazakhstan's export volumes and the dynamics of dividend outflows. For Armenia and Uzbekistan, a similar rise in oil prices would increase import costs by about 0.5% of GDP.

Regarding inflation, ING notes that global food prices have already risen by 6% year-on-year. The group estimates that a further 10% increase could accelerate inflation by about 1 percentage point in Kazakhstan and Uzbekistan and by 1.5–2 percentage points in Armenia and Azerbaijan.

"The share of imports from developed countries and the Middle East ranges from 26% in Armenia to 35% in Kazakhstan and Uzbekistan, and about 45% in Azerbaijan," the report says.

Furthermore, ING Group notes that domestic resilience factors make a widespread currency collapse unlikely.

"In Kazakhstan, this is supported by high real interest rates and the accumulated volume of upcoming foreign currency sales by the state. Uzbekistan has yet to catch up on gold exports, Armenia can count on remittance inflows and significant reserves, and Azerbaijan on substantial sovereign assets.

In an adverse global scenario, we see a risk that our medium-term inflation forecast will be exceeded by 1–2 percentage points. Since the shock is cost-driven, it may not require an immediate change in monetary policy, but central banks may need to maintain real interest rates. Armenia may continue tightening, Kazakhstan and Uzbekistan have limited room to cut rates, and Azerbaijan's reluctance to raise rates could be tested," the report says.