Favorable oil prices support economic activity and business dynamism. Oil and gas constitute almost 90% of Azerbaijan's exports and 50% of GDP, APA-Economics reports citing S&P Global Ratings.
In our view, current oil prices will benefit Azerbaijan's economic, fiscal, and balance-of-payments performance. The banking sector has been more resilient to macroeconomic challenges than expected in recent years, particularly credit costs and asset quality metrics. Nevertheless, we believe that easing economic risk in Azerbaijan is cyclical rather than structural, supported by favorable commodity prices and better business dynamism.
Gradual post-pandemic recovery continues, but long-term growth prospects remain modest. We project economic growth at 4% for 2022 after a 5.6% rebound in 2021, mostly reflecting an increase in gas production, discontinuation of OPEC+ cuts, and recovery of the non-oil sector. Over 2023-2025, we expect growth will average 1.5% as new gas capacity compensates only partially for gradual oil sector decline. Similar to other countries, rising inflation and price pressures reflect the impact of
post-pandemic reopening, food price inflation, and some administrative price increases, including for domestic energy. We forecast inflation will average 13.5% in 2022.