CONFERENCE CALL: The first Azerbaijan investment summit

By bne IntelliNews December 11, 2009

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"Azerbaijan will be the success story of the 21st century and the new Singapore."

These were the opening remarks in the presentation of AFB Bank at the first ever Azerbaijan investment summit in London in December. Hype? Well, after sitting through two days of talks, you start to wonder... It is not so much that Azerbaijan is growing spectacularly fast that is convincing, but the fact it is growing at all when almost no one else is that is so enticing.

AFB is one of the new entrants to the fast growing Azeri banking sector, which has seen assets treble in as many years to 2008 and continues to grow - albeit at slower rates - since the international crisis felled the global financial sector. But the growth rates are still stunning. The Economist Intelligence Unit named Azerbaijan as the fastest growing country in the world in December, beating out the "it-girl" of the international investment club, China, to the top slot. "In September, the government released an astonishing estimate for full-year GDP growth - of 12.9%. For much of the year, this has looked utterly untenable. Recently released data for January-October, however, show that the gap between actual performance and the government's estimate is narrowing: in January-October, GDP rose by 8.3% year on year," says the EIU. "This is mainly due to rising oil output, although the retail trade and paid services are also flourishing, thanks to double-digit growth in wages. It looks unlikely, though not impossible, that the government's full-year target will be met. But Azerbaijan may nevertheless beat China to the title of global growth leader for 2009," the EIU said in a report.

Azerbaijan has posted very fast GDP growth in recent years: 34.5% in 2006, 25% in 2007 and 10.8% in 2008.

But surely the literally ballistic growth rates are all a function of the low base effect, right? Azerbaijan has been in the last round of former Soviet Republics to get the reform religion and start liberalising their economy, unleashing market forces in the process. True. But Gleb Shestakov, partner with Global Fund Management and the first foreign investor to buy an Azeri government bond in 2005, was full of praise for the local banking sector and says the growth is real, as the sector is unfettered by any of the problems most other markets in the region face. "The Azeri banking sector is small and beautiful and was 'too small to fail' rather than too big. The bank sector borrowing was up to $2.5bn as of 2008, but they had not had enough time to build up the leverage as in the West or even the same levels in the [Commonwealth of Independent States]. When the name of the game changed to de-leveraging, it was a game the Azeri could play easily."

The ratio of bank assets/GDP is only 28% against Russia's 57% and the over 200% of some EU countries, so investors into the sector - including Sturgeon Fund, Kazmir partners, the The European Bank for Reconstruction and Development (EBRD) and others - are looking forward to a doubling in the size of the sector in only a few years.

Oil prices

But all this fast growth is due to high oil prices, right? True. The government has been coining it from the record high oil prices in recent years and built up a huge war chest of over $19bn in hard currency reserves against total external debt of $3.3bn - in other words the country can cover every dollar of international debt with over $5 of cash. Even Russia, which is the third-richest country in the world in terms of cash on deposit, can only cover $1 of debt with $1 of cash. And in the West all the developed countries are in a very deep hole indeed.

Oil is the key variable in the country's public finances, but thanks to the reserves even if oil prices stay low for several years, the state can still easily finance any shortfall. However, the feeling amongst the delegates, who included many from the country's oil industry, was that the near future is rosy. In a straw poll, delegates were asked if they thought the price of oil would rise from the current level of around $75 as of the start of December and almost the entire room put their hands up in "yea" vote.

Diversify hard

The government was selling the need to diversify its economy hard to a hall full of international investors, as it fully realises the country must do so to prosper. Beyond the hydrocarbons sector, Azerbaijan's industry has struggled and the government anticipates a 20.3% expansion of the oil economy, but only a 3.2% increase in the non-oil economy in all of 2009. "Diversification of our economy is essential to our survival. Government has ensured a stream of revenue for the budget from oil, but now we are investing into the non-oil sector and you will salivate at the thought of all the projects you can do in the country," says the silver-tongued head of the Azerbaijan Investment Company (AIC), Afgan Isaev.

The AIC was set up a few years ago and tasked with bringing in foreign direct investment into any sector other than oil. And it can offer very attractive terms for potential investors. "You only need to bring a little money to Azerbaijan; you can contribute your equipment as capital in kind. AIC will provide its own financing and this is better than a state guarantee, as your risks are our risks," says Isaev, who cut his teeth in New York's investment banking world.

The state organs on display were all singing the same tune and much was made of the country's rapid rise up the World Bank's "ease of doing business" ranking this year to rank at 34.

Clearly, the government has realised the need to diversify and the crisis only underscored the need to reduce its dependence on the black stuff. But after all is said and done, the conference highlighted how early in the process Azerbaijan is. Most of the presentations were made by state bodies and there are few large foreign investors (outside of the oil sector) on call to sell the state's vision to their peers in London. At most, several funds gave convincing presentations that highlighted the potential of the place (and, most convincingly, these funds have clearly already made a lot of money), but the message is only now starting to get out.

In the Apocalyptic post-crisis world where money will be hard to make, simply advertising the message, "We are the fastest growing country in the world and we need investment into pretty much everything," will probably be all the government has to do to tempt some real interest from the shell-shocked investors in more traditional markets.

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