Analysis: Oil price weakness to test Azeri budget, currency

BAKU, March 16 (Reuters) – The impact of the global crisis on
Azerbaijan could spread beyond reduced remittances and stalled
building projects, as further oil price weakness would test its
currency, budget and ultimately political stability.

The Caucasus state, a supplier of oil and gas to Europe from the
Caspian Sea, is set to face plunging revenues this year as oil prices
languish below $50 a barrel compared to nearly $150 last summer.

The rainy-day state oil fund gives the former Soviet republic a
cushion against weak oil prices but officials say a budget revision is
possible in May-June as the main financial document was based on a
price of $70 per barrel versus $44 now.

The fund is forecast to receive $10.5 billion in 2009 based on an
average price per barrel of $70, compared with $14.9 billion in 2008.

"The oil fund assets are going to be depleted while the fund itself is
not being replenished this year," said Ana Jelenkovic, an analyst with
London-based Eurasia Group.

"What that means is that Azerbaijan is going to face a more difficult
time, perhaps not in 2009 but in 2010, depending on how much the
(economic growth) is forced to (slow), how long the oil price remains
depressed."

Azerbaijan holds a referendum on Wednesday on whether to scrap the
country’s two-term presidential limit and allow President Ilham Aliyev
— son of late long-serving leader Heydar — to run again in 2013.
[ID:nLD602175]

Some observers see the vote as a move to shore up 47-year-old Aliyev’s
rule against the uncertain impact of the global economic crisis, with
deflated oil prices threatening to rein in spending plans key to
keeping the people happy.

Azerbaijan can look on its relatively undeveloped financial sector as
a blessing, unlike Central Asia’s crisis-hit energy powerhouse
Kazakhstan, whose banks have been hit by huge foreign loan exposure.

The country’s Manat currency is holding its ground against the dollar
but pressure on authorities is growing to follow the path of
Kazakhstan and Russia and weaken the exchange rate to cope with lower
oil prices.

"It’s possible we’ll see the Manat devalue after the referendum," said
a senior Western diplomat.

GROWING FRUSTRATION

The Azeri economy was among the fastest growing in the world with
growth averaging 21 percent between 2003 and 2007.

Growth is now expected to slow to 10 percent in 2009, down from 10.8
percent in 2008, as oil revenues account for up to 60 percent of the
budget — more than in Russia or Kazakhstan — and the country has so
far shown little creative thinking on how to stimulate other growth
industries.

The construction sector, a rare boom-business during the bull market
for oil, is feeling the pinch. Baku high-rises built on the basis of
future sales are seeing demand decline and some large projects have
ground to a halt.

The economy is also suffering from lower remittances from Azeris
working in Russia, which is sliding into its first recession in 10
years.

The number of Azeris working in Russia is estimated at between 900,000
and 2 million. Individuals sent $1.06 billion in 2008 from Russia to
Azerbaijan, Russian central bank data shows. It does not give
quarterly breakdowns by country, but overall transfers from Russia
shrank 24 percent in the fourth quarter.

The fall in money being sent home will be felt most in the provinces,
the traditional destination for remittances, and the scope for budget
support will be also limited.

Last month, Baku slashed its annual oil output forecast by a fifth to
45 million tonnes due to problems at a BP-led <BP.L> Caspian project.

This could mark the first year of flat production after a decade of
growth, which saw output rising five-fold, and could force authorities
to further cut economic growth targets.

The jury is out on whether the economic downturn will translate into
social unrest and a challenge to Aliyev.

One senior Western diplomat said that despite widespread anger at
rampant corruption, the "organs of power" were too effective to allow
discontent to spill over.

Jelenkovic said the government needed to keep spending to keep a lid
on frustrations.

"It is a growing concern for the government," said Jelenkovic. "I
think we’re going to see stability questioned, but it’s certainly not
a near-term concern because Aliyev is still very much in control".
(Additional reporting by Afet Mehtiyeva, writing by Matt Robinson;
editing by Toby Chopra)