The 2017 draft budget includes a cut in transfers from the Sovereign fund (SOFAZ) for the fourth consecutive year, thus reducing budgetary revenues. Tax revenues are also expected to remain low, given the sluggish growth. Revenues from the hydrocarbon sector (over 50% of the total) are, in contrast, expected to rise slowly, benefiting from a rise, though modest, in prices.
The government has announced a sharp cut in spending after an increase in spending in 2016 which failed to have the hoped for effect in supporting growth. Capital investment is likely to be revised downwards and the wage increases and social spending introduced in 2016 will not be repeated.
Azerbaijan could avoid another current account deficit in 2017, given the slight rise in hydrocarbon prices (95% of total exports). However, export volumes are not expected to grow by much, with oil production having peaked and an increase in gas production not expected before 2018, when the second phase of the Shah Deniz project is launched. Imports are expected to grow very slightly, because of moderating demand and public investment.
Having lost about 50% of its value against the dollar in 2015, the manat's exchange rate continued to weaken in 2016, but much more moderately (-6% between January and early November 2016). The lack of foreign exchange, associated with low export income restrained by low hydrocarbon prices, could persist, implying ongoing downward pressure on the exchange rate. The government's desire to maintain its foreign exchange reserves, which fell by two thirds between early 2015 and late 2016, could lead to another devaluation in 2017, the scale of which will, however, be smaller than in 2015.
SOFAZ assets (around USD 34 billion, or 50% of GDP in October 2016) and reserves which, taken together, remain satisfactory (4 months of imports), limit the country's risk of a liquidity crisis. In contrast, the banking sector, highly dollarized (over 80% of deposits), is exposed to such risk. Another depreciation would further weaken the balance sheets of institutions whose access to foreign exchange is moreover limited by the central bank.