Eurovision: Singing a song for Azerbaijan’s investment market

25th May 2012

A lot of people will be scouring atlases for Azerbaijan this weekend as it hosts the Eurovision song contest, the world's largest non-sport TV event.

For those who can't be bothered to look, it's a country in the Caucasus, bordered by Russia, Georgia, Iran and long-standing enemy Armenia.

It has spent a fortune sprucing up capital Baku. It has laid out an estimated $100m on a new 23,000 seat arena plus new roads and other facilities. It has also brought in fleet of London black cabs to celebrate the event – seen as a rehearsal for the nation's 2020 Olympics bid.

A mini-China in the making

This could be a mini-China in the making – certainly the still tiny Baku Stock Market has seen volumes rising steeply this year. And it has another facet that investors – but not those of a socially responsible leaning – love.  Strong government. Earlier this month, the captains of free market corporates in the liberty capital of the world expressed their admiration of the leadership of the Chinese Communist Party.

Nearly two out of three US chief executives in a recent survey expressed their admiration for the party – in some cases because of, rather than in spite of, its human rights record. Most liked the long term clarity the party offered.

Azerbaijan has strong government. It has been accused of human rights violations recently and in the past. President Ilham Aliyev has an impressive biography and was backed by 88 per cent of the population at the last election four years ago. In 2003, his party gained 77 per cent in a vote condemned by the Council of Europe, Human Rights Watch and other international organizations, as well as local independent political and NGOs for vote rigging and a badly flawed counting process. Human rights are now deteriorating further, according to a recent statement from the International Federation of Human Rights.

Government confidence but doubts elsewhere

The Azerbaijan government is confident about its largely oil-based economy.  An official forecast for the Azerbaijani economy in 2012 from the Ministry of

Economic Development reports optimism despite the downturn in the world economy.

The Government of Azerbaijan targets has targeted 5.7 % GDP growth in 2012 while the Central Bank's monetary policy intends "keeping inflation to single digits"  expecting a fall from 8% last year to 6%.

The official hope is that this growth rate should continue well into the future, especially if the state continues spending oil revenues on infrastructure projects. The government  hopes that tourism will rise exponentially as a result of Eurovision provided it is free of human rights demonstrations.

But perhaps investors should take government forecasts with a proverbial pinch of salt. The Ministry of Economic Development forecast 3.8 % economic growth for 2011 – the reality was 0.2 %. and it had to revise inflation from 5% to 8%.  This year will benefit from Eurovision spending.

And while the International Monetary Fund (IMF) projects 7.1 % for Azerbaijan's economic growth in 2012, it also forecasts inflation into double figures at 10.3%, both figures are significantly different from the official predictions.

The Asian Development Bank  has yet more figures 4.5% GDP growth for Azerbaijan  with7% inflation. 

Playing down the figures

Oddly enough, the chairman of the Azerbaijan Center for Economic and Social Development Vugar Bayramov is playing down the growth figures, pointing to previous inaccuracies. He believes the country will be hit by the global slowdown

In his view, the achievement of those forecasts is essentially unrealistic.

He cites lower oil sales, some 60% of state revenues,  and a drop in non-oil exports. 

This could be a classic talking down of expectations, however.

The Baku Stock Exchange is the only stock exchange in Azerbaijan. It trades treasury bonds, common stocks and foreign currency futures. It is generally regarded as beyond frontier markets although it has attracted a big volume growth this year – often a precursor to a surge of attention and an inflow of foreign money.

Information is hard to come by but while there is no available index,  prospective investors can find a linkedin page which so far has attracted 26 followers. And international investors can find help with funds here while there are details of the Azerbaijan Investment Company here.

What are the risks?

Beyond frontier markets are not just not for the nervous – they are only for the very brave.

There are many factors that could wreck an investment besides the normal economic risks and the corruption that is endemic to the region.

 


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