BAKU, Azerbaijan, October 15. Each additional $10/bbl increase in oil prices could boost Azerbaijan’s annual exports by 2-4% of GDP, says the Dutch ING Group.
“Azerbaijan is more stable: higher oil prices reinforce its buffers, while the manat peg limits imported inflation. With CPI within the 4±2% target range, we expect the policy rate to stay at 6.50%,” the ING said in its latest report on October 15.
ING’s base case for the regional rates in CIS-4 (Azerbaijan, Armenia, Kazakhstan and Uzbekistan) and currencies remains constructive and domestically-driven.
“But resilience to more persistent global inflation and higher core rates could be put to the test through the exchange rate channel. While we don't expect a sell-off, high real rates will be required to keep attracting portfolio inflows,” says the Dutch ING Group.
ING notes that each additional $10/bbl could lift annual exports by 2-4% of GDP in Azerbaijan and Kazakhstan, although the FX effect is constrained by Azerbaijan’s peg and Kazakhstan’s export volumes and dividend-outflow dynamics. For Armenia and Uzbekistan, it would add around 0.5% of GDP to import costs.
As for inflation, the Group notes that global food prices are already 6% higher YoY and it estimates that each 10% increase could add around 1ppt to the inflation trend in Kazakhstan and Uzbekistan and 1.5-2.0ppt in Armenia and Azerbaijan.
“Broader exposure to imports from developed markets and the Middle East ranges from 26% in Armenia and 35% in Kazakhstan and Uzbekistan to around 45% in Azerbaijan,” says the report.
Moreover, ING Group notes that higher core yields would weaken carry-driven support for the tenge and soum, reducing their insulation from imported inflation.
“But domestic buffers argue against an indiscriminate sell-off: Kazakhstan has high real rates and a backlog of state FX sales; Uzbekistan will be catching up on delayed gold exports; Armenia can fall back on its remittance inflows and comfortable reserves; and Azerbaijan can rely on its exceptional sovereign assets.
In an adverse global scenario, we therefore see 1-2 ppt upside risk to our medium-term inflation outlook. The cost-driven nature of the shock may not require an immediate policy response, but central banks may need to protect real rates: Armenia could tighten further, Kazakhstan and Uzbekistan have less room to cut, and Azerbaijan’s reluctance to hike could be challenged,” reads the report.
