Azeri Light tends to trade around US$3-4 above the level of benchmark Brent crude, which is currently priced at just over US$50/b. We forecast that Brent crude will average US$80/b this year, although this is likely to be revised down in our next global forecasting round. 

We believe that Azerbaijan's 2015 budget deficit will remain under 2% of GDP.

This year's transfer from the State Oil Fund of the Republic of Azerbaijan (SOFAZ) has been fixed at Manat10.4bn (US$13.3bn), equivalent to 53.4% of total revenue. Despite falling oil prices, the authorities are unlikely to reduce the level of this transfer, even if this leads to a fall in net SOFAZ assets. 

The lower oil price will, however, lead to a fall in revenue from taxes on the oil sector that are not paid into SOFAZ. The Centre for Economic and Social Development, an Azerbaijani think-tank, estimates that these account for around 11.6% of total budget income. We now forecast that revenue from this source will decline by around 30% this year. 

The lower oil price will probably also have a knock-on effect on the performance of the non-oil sector, which accounts for around 35% of total revenue.

Nevertheless, we continue to expect that revenue from the non-oil sector will increase in 2015, by around 4% year on year.

Taking this conservative estimate of 4% growth in revenue from the non-oil sector, a 30% decline in oil tax revenue and no change in the size of the SOFAZ transfer, we will be revising our forecast for 2015 total budget revenue to Manat20.08bn in our next forecasting round, a rise of 5.5% year on year. 

We believe that the government will not reduce its planned expenditure of Manat21bn. The government officially projects revenue growth of just 2.2% year on year in 2015. Therefore, even with oil prices averaging US$70/b, the deficit is likely to come in below the government's forecast. This is in line with the government's tendency to set conservative revenue forecasts, which it then exceeds.

 

(Economic Intelligence Unit)