SOFAZ assets up in 1Q as govt cuts transfers to state budget

The assets of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) grew by 6.7% year on year in January-March, to stand at US$36.6bn, according to results published at the end of May.

The rise in SOFAZ assets is a result of the fiscal adjustment that the government implemented at the start of 2014, which has reduced the level of transfers from the sovereign wealth fund to the budget. The government intends to transfer Manat9.34bn (US$11.9bn) to the state budget this year, an almost 18% reduction compared with 2013. 

In line with these plans, the transfer to the budget totalled Manat2.34bn in the first quarter, 17.5% below the figure in the same period last year. However, revenue from the energy sector also declined in the first quarter, by 11.8% year on year, to Manat3bn. This reflects the impact of declining output and flat oil prices.

The government's fiscal adjustment means that revenue will continue to outstrip transfers in 2014, allowing sovereign wealth assets to continue to grow. To sustain this in the future, however, the government will have to reduce SOFAZ transfers to the budget further. 

A combination of falling output, rising investment costs and declining prices (we expect prices to fall by around 11% in 2014-18) means that SOFAZ revenue from the energy sector will fall steadily over the next few years. This will require a structural change in the economy and a strong commitment to diversification. 

Dependence on oil revenue is high: between 2001 and 2013 SOFAZ received assets of US$100.11bn, but transferred US$64.23bn to the budget, the majority for operational spending. The dominance of the energy sector, combined with the weak business climate, means that the authorities will find it difficult to make up the shortfall in fiscal revenue from the non-oil economy.

SOFAZ's summary of its performance in the first quarter also reveals that the fund's return on investment was weaker than officials expected, owing to the negative impact of events in Ukraine. In recent years the fund's managers have started to diversify SOFAZ's investment portfolio. The fund announced in April that it had acquired an office block in South Korea-its first real estate acquisition in Asia.

(Economic Intelligence Unit)

Bakudaily.az