Our newest online series, 'Markets in crisis,' rooted in our Global Trends 2016 outlook, examines how resource-rich countries are at risk of sovereign default. Today's inaugural post examines Azerbaijan, a nation that relies on hydrocarbons for 92% of its exports.
With commodity prices bottoming out against a strong US dollar and rising inflation, a number of countries face possible economic crisis. An integrated team of Wood Mackenzie and Maplecroft analysts will be examining specific countries one by one as they struggle against a tide of uncertainties in 2016. We'll weigh in on the forces driving each nation's economy and how geopolitical developments and sustained low-price commodity markets will impact their energy sectors.
Our first look is at Azerbaijan, an economy heavily dependent upon hydrocarbon exports. Its currency, the manat, has lost 51% of its value against the US dollar since February 2015, despite the government spending the majority of its foreign reserves to support it. The domestic banking sector is now strained from external debts — a risk for project financing.
Azerbaijan and its Shah Deniz Phase Two development will open the Southern Gas Corridor and help diversify Europe's gas supply from 2019. However, additional gas exports will offer limited upside to the State budget, which will continue to rely heavily on oil sales from the BP-operated Azeri Chirag Guneshli field. The contract for this super-giant field expires in 2024 and extending it is key to maintaining inputs into the State Oil Fund.
Despite the country teetering on the edge of financial crisis, our base case analysis indicates that it will avoid sovereign default, but require more foreign investment as its economy deteriorates further — a significant challenge in the current low-price environment.
Next in our series … a detailed look into Venezuela.
Our Insight report, 'Resource-rich markets at risk: Azerbaijan,' offers a detailed look into the investments and challenges shaping Azerbaijan's economy. You may purchase it on demand via woodmac.com or as part of a subscription service.
For a comprehensive overview of what to expect in 2016 from a global perspective, you can also find our recent Insight report 'Global trends: what to look for in 2016' available for purchase online.
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