Azerbaijan Challenges and Opportunities 11 May 2016 OFFICIAL USE

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1 Azerbaijan Challenges and Opportunities 11 May 2016

2 US$ bn US$ bn AZERBAIJAN GDP trends Nominal GDP, US$ bn Real growth, % yoy 34.5% 26.4% 25.0% 5.0% 5.8% 10.8% 0.1% 2.2% 2.8% 1.1% 40% 35% 30% 25% 20% 15% 10% 5% 0% Oil GDP, US$ bn Non-oil GDP growth, % yoy Oil vs. non-oil GDP Non-oil GDP, US$ bn Oil GDP growth, % yoy 80% 70% 60% 50% 40% 30% 10.0% 20% 7.0% 1.1% 10% 1.0% -2.9% 1.1% 0% -10% GDP composition (2014) GDP composition (2015) Net exports 16.9% Household consumption 45.0% Changes in inventories 0.1% Net exports 3.0% Household consumption 55.8% Changes in inventories 0.1% Gross fixed capital formation 28.6% Gross fixed capital formation 27.2% Government consumption 10.8% Government consumption 12.5% Sources: national statistical authorities

3 Jun-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 US$ billion AZERBAIJAN Export 1995 Export 2014 Export 2015 Non-oil export 14% Oil export 86% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 26.5% 11.6% External and fiscal balances Gen. gov't balance, % of GDP 21.5% 4.8% 16.4% 1.5% 13.9% 2.8% Current account, % of GDP In US$ terms, CA receipts from oil/gas sector declined by 45% yoy in % -0.2% -3.4% -12.5% e. 2016f Official reserve assets of the CBA Sources: Central Bank of Azerbaijan, State Statistical Committee of Azerbaijan, IMF WEO (April 2016), Atlas of Economic Complexity (CID, Harvard University), Nasdaq.

4 EBRD Operational Track Record in Azerbaijan Cumulative investments in to Azerbaijan amount to EUR 2.5 billion with 162 signed projects. The total portfolio in Azerbaijan reached EUR 1.0 billion with active portfolio projects reaching 60. Private share of portfolio is 73.1% Portfolio: Sector Breakdown Annual Bank Investment and Operations Agribusiness 6% Manufacturing & Services, 12% Manufacturing & Services, 10% As of 31 March, 2016

5 Azerbaijan: Key Transition Results and Implementation Challenges #1 Until recently, the absence of reform appetite made it difficult to progress on country-level strategic objective, despite successful projects and EBRD being the largest investor in the non-oil private sector Country Strategy Priorities Key Transition Results Implementation Challenges Way forward 1. Promoting market-driven economic diversification Helped expand capacity and productivity of clients in M&S and agribusiness private sector Contributed to increase in turnover and employment of ASB clients Increased operational risk as devaluations of the manat (50 per cent in 2015) hit the non-oil private sector. Broaden access to LCY Provide critical working capital and debt restructuring support to clients 2. Developing a sustainable financial sector to support private sector development Stimulated MSME lending, particularly in underserved regions, and introduced new products such as EE credit lines Contributed to decrease of historical dominance of IBA Large increase in NPLs, interest rates caps on MSME lending and restricted manat availability Support consolidation of the banking sector. Support NPL resolution policy with other IFIs

6 Azerbaijan: Key Transition Results and Implementation Challenges #2. however, the low oil price is now creating incentives for deep reforms, and the Government is taking the opportunity of the crisis to introduce significant reforms in the investment climate and infrastructure sector Country Strategy Priorities Key Transition Results Implementation Challenges Way forward Leverage momentum and encourage the authorities renewed reform efforts in improving investment climate (e.g., customs, export and permits licensing). Stand ready to support privatisation programme 3. Improving governance and the business environment Promoted increased transparency levels among corporate clients (several clients adopted IFRS accounts) Until recent decrease in oil prices, no sense of urgency on need for reforms Slow progress in transport reform affected disbursement of $750m regional roads programme Support transport projects with regional significance to reignite governance reforms: o subject to progress on road sector funding and private involvement in maintenance, explore re-allocation of $500m from $750m regional roads reconstruction programme, to finance widening of Ganje - Georgian border highway part of the EU-TRACECA corridor. o Seek to support modernisation of Azeri Railways through a comprehensive restructuring programme. Seek opportunities to support Southern Gas Corridor project, enabling regional energy market development and expansion of export opportunities for Azerbaijan, as well as cooperation with the government on public procurement reform and re-compliance with EITI principles 1 1. Azerbaijan Country Strategy Priority 3 Improving governance and the business environment: The Bank will support projects of regional significance that enhance regional trade via diversification of hydrocarbon export routes and which favour regional integration of energy infrastructures

7 Case study 1 Veysaloglu Group (Ulduz) Producer of chocolate and importer of a wide range of food products and soft drinks. EBRD provided US$ 9 million financing to support the company s expansion. The chocolate brand Ulduz is one of the best known in Azerbaijan. EBRD financing enabled the company to increase its production capacity and expand its current product range with three new confectionary manufacturing lines for Azerbaijani and foreign consumers.

8 Case study 2 Slavyanka EBRD signed a 4.6 million loan agreement with Gedebey Mineral Sulari, one of the leading bottled water producers in Azerbaijan. The funds were used to purchase new equipment to increase the company s production capacity, in order to respond to fastgrowing product demand and to strengthen its distribution.

9 Layouts for charts, images, tables, smart art or video 18 May,

10 Thank You Neil McKain Head of Resident Office EBRD Azerbaijan 18/05/2016