Azerbaijan's economy remains highly resilient to external shocks, supported by elevated oil prices, strong financial reserves and the stability of the manat against the US dollar, according to an analytical review by ING.
Dmitry Dolgin, ING's Chief Economist for Russia and the Commonwealth of Independent States (CIS), said the baseline outlook for monetary policy and national currencies in four regional economies—Azerbaijan, Armenia, Kazakhstan and Uzbekistan—remains positive, supported primarily by domestic economic factors.
However, the economist warned that rising global inflation and higher interest rates in developed economies could pose risks to regional financial stability.
"At the same time, rising global inflationary pressures and higher base interest rates in developed economies could threaten the region's stability through the currency channel of risk transmission," Dolgin noted.
According to the review, the four economies have demonstrated resilience to increased market volatility, inflationary expectations and tighter global financial conditions following the escalation of tensions in the Middle East.
Although ING does not anticipate significant capital outflows from regional assets under its baseline scenario, Dolgin said central banks would need to maintain sufficiently high real interest rates to preserve portfolio investment inflows.
Regarding Azerbaijan, the economist highlighted the country's energy revenues and exchange-rate stability as important factors supporting its economic outlook.
"Thanks to high oil prices, which strengthen the country's financial reserves, and the stability of the manat against the US dollar, which curbs price pressures from imports, Azerbaijan's economic situation remains highly resilient to external shocks," he stated.
With inflation remaining within the Central Bank of Azerbaijan's target range of 4±2%, ING expects the regulator to maintain its policy rate at 6.5%.
The outlook differs across the other three economies.
Kazakhstan and Uzbekistan have room to gradually ease monetary policy as inflation moderates and their national currencies strengthen.
According to Dolgin, Kazakhstan's tenge has appreciated by 11% since the escalation involving Iran, supported by capital inflows and public-sector foreign currency sales.
Annual inflation in Kazakhstan has declined by three percentage points to 9.3%, allowing the National Bank to reduce its base interest rate from 18% to 16.25%.
In Uzbekistan, inflation has slowed by nearly one percentage point to 6.4%, while the policy rate stands at 14%.
Nevertheless, inflation in both countries remains above their 5% targets, while domestic demand continues to be strong, limiting the scope for further monetary easing.
Armenia, meanwhile, faces a different situation. Stronger consumer demand, supported by tourism and remittances, has pushed inflation to 4.3%, exceeding the central bank's 3% target.
The Armenian regulator raised its policy rate by 25 basis points to 6.75% in September, and ING believes further tightening could become necessary if inflation approaches 5%.
The report also examines the potential consequences of a more severe external economic shock.
Under a scenario involving a sharper increase in commodity prices and persistently high global interest rates, ING estimates that inflation across the four economies could rise by an additional 1–2 percentage points over the medium term.
According to Dolgin, a $10-per-barrel increase in oil prices could raise Azerbaijan's and Kazakhstan's annual export earnings by an amount equivalent to 2–4% of their respective GDPs.
For Armenia and Uzbekistan, the same increase could raise import costs by approximately 0.5% of GDP.
The economist also warned that a 10% rise in global food prices could add around one percentage point to inflation in Kazakhstan and Uzbekistan, and between 1.5 and 2 percentage points in Azerbaijan and Armenia.
The share of imports originating from advanced economies and the Middle East ranges from 26% in Armenia to 45% in Azerbaijan, illustrating the region's exposure to external price developments.
Should these risks materialise, ING expects central banks to adjust their monetary policies accordingly.
Armenia may need to continue tightening monetary policy, while Kazakhstan and Uzbekistan could face more limited opportunities to reduce interest rates.
For Azerbaijan, Dolgin suggested that a significant deterioration in external conditions could require the Central Bank to reconsider its current pause in interest-rate adjustments.