Azerbaijan's State Oil Fund reports over $5bn in losses from asset management and FX in first nine months

Azerbaijan's State Oil Fund reports over $5bn in losses from asset management and FX in first nine months
SOFAZ revenues for 2023 are projected at the level of AZN8.99bn / bne IntelliNews
By Cavid Aga in Baku November 29, 2022

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) reported losses from asset management of $2.659bn,  or  5.7% of its value, as well as extra-budgetary expenses amounting to $2.46bn largely due to exchange rate appreciation, according to the nine-month performance indicators presented to the Accounts Chamber. The budget deficit of SOFAZ is projected at the level of AZN2.4bn for 2023.

Meanwhile, SOFAZ revenues for 2023 are projected at the level of AZN8.99bn (-43.1% of the forecast for 2022), and expenses at AZN11.3bn (-1.8%). SOFAZ revenues for 2023 are calculated from an average oil price of $50 per barrel (for 2022 it was $85 per barrel).

According to the draft budget project, revenues to SOFAZ from the sale of profitable oil and gas in Azerbaijan in 2023 will amount to AZN6.571bn or 73.1% of the fund's total income. Bonuses to be paid by oil and gas companies are projected at AZN800.7mn, and income received from the management of SOFAZ assets would be AZN1.59bn.

Transit revenues for next year are projected at AZN23mn, and receipts from oil and gas companies on per-acre payments were AZN4.3mn.

In the structure of the fund's expenses for 2023, AZN11.28bn or 99% will be transferred to the state budget of Azerbaijan. Expenditures for the implementation of the State Programme for Improving the Competitiveness of the Higher Education System in Azerbaijan for 2019-2023 are projected at AZN38mn. In addition, the costs associated with the management of the fund are envisaged in the amount of AZN37.1mn, expenses under the State Programme for the Education of Azerbaijani Youth in Prestigious Foreign Higher Educational Institutions for 2022-2026 tab are AZN36.7mn.

Earlier, in 2022, the revenues obtained from the management of the State Oil Fund's assets were initially predicted to be 1.7% or AZN1.2bn, but later, taking into account the processes occurring in the market and the resulting uncertainties, the expected profitability in the honest budget was determined as 0%. According to the monthly performance indicators, it was reported that there was a loss of AZN4.5bn or 5.66% from the management of funds.

As of the reporting date, the fund's extra-budgetary expenses amounted to $2.4bn, including $447.8mn for gold, and $2bn for the difference caused by exchange rate changes. The main share of the negative return on the difference arising from the change in exchange rates was on the portfolios of euro ($1.24bn), GBP ($418.7mn) and JPY ($118.7mn).

According to the Account of Chambers' forecast, the volatility observed in the oil price in recent years, the reduction of production by fields, as well as the presence of risks related to the obligation to reduce production within the framework of OPEC+, as well as the possibility that the income from the management of the fund's assets will not be at the predicted level due to the fluctuations and volatility in foreign financial markets, increases the probability that the fund's assets will eventually decrease.

SOFAZ, established in December 1999, accumulates revenues from the implementation of oil contracts, in particular from the sale of profitable state oil and gas, transit tariffs for the transportation of oil and gas through the country, the lease of state property, etc.