Azerbaijan: The financial system in 2014

There are no complete data about monetary indexes of year 2014 yet. But the available indexes prove that the year was rather successful. The key indexes of the banking system have grown .

ASSETS, LOANS AND AGGREGATE BANKING SYSTEM CAPITAL (MLN.AZN)

It was obvious in December that the price crisis will affect us as well, our financiers tried to brace themselves claiming that slump of oil prices will not seriously affect Azerbaijani economy. The first criticism of this sector showed up when President Aliyev called quadrupling of credit rates above the CBA re-financing rate (3.5%) an outrage and demanded reduction of the rates. Then the Central Bank has made a statement claiming that it will allow neither deflation, nor growth of inflation. This was the first statement of this kind, because CBA’s target was always inflation. But the above-mentioned indexes of the basic inflation show that the monetary factors have not played a significant role in inflation. Noticeable ignoring of the Baku Stock Exchange by CBA and the Finance Ministry proved that. There was no need in sterilization of the manat supply  as well as no need in local borrowings. The situation was approaching deflation.

When the oil prices went down to $50.00 per barrel, it was obvious that the problems with budget are inevitable next year. The fact that President delayed approval of the Oil Fund’s budget proved that. In the past years Oil Fund (SOFAZ) was the main donor of Azerbaijani budget. There was really no choice here: either Oil Fund’s deficit, or deficit of the state budget. Only on January 15, 2015 President approved SOFAZ budget and for the first time it had deficit. In 2015 SOFAZ’s incomes will be 10,246,611,900 AZN, while costs – 11,813,909,200 AZN.

The non-governmental Centre for Economic Research as rated by reducing transfers SOFAR for different variants of oil prices.

EXPECTED OIL REVENUES IN 2015

Estimations of CER

It is interesting that sequestering budget of the country for fiscal year 2015 has not been even discussed in Azerbaijan, though neighboring Iran has already reduced the budget forecast of oil prices to $50.00 per barrel. For the first time in many years the operation plan of execution of the budget for fiscal year 2014 has been submitted to publicity. The goal was, probably, to show that the government has already transited to the saving regime. The deficit was not big (table). Many items of budget expenses have been cut. Only social and investments expenses of the budget have remained unchanged. Everything is clear with the social costs – they are protected by the law on the budget system. Full use of investment expenses is less obvious, though last year President stressed the necessity of their reduction.

STATE BUDGET OF THE COUNTRY IN 2013-2015  (mil.AZN )

President’s statement made during discussion of the third state program of regional development from 2015 to 2018 has caused confusion. He said: ‘I believe that if manat is tied up to Euro, this will strengthen macro-economic stability. At the same time this will positively affect people’s everyday life, because Azerbaijani economy must be developed as  an export economy.” The statement has been made against the background of declining Euro rate against USD. Many Azerbaijani businessmen are ready to the investment acquisitions in Europe, expecting further decline of Euro rate. From the viewpoint of prices for European goods, this has  opened good perspectives for the Azerbaijani consumer. One should just closely watch the AZN rate to Euro to be established by the CBA these weeks.

One cannot rule out another variant of development of events. Firstly Pressure to the currency stock market is growing. It’s shown from decreasing of currency reserves of Central Bank, Currency reserves dropped  ( to 12 mld 688 mln) in  the end of January  this year in compared   with date of  December 31 of 2014  -  13 mlrd 758.3 mln.)

If the situation with the budget is seriously deteriorated, then the government will decide to reduce transfers from SOFAZ and it could also reduce value of national currency. This is a tried method, though there are no objective preconditions for that yet. However, Russia did not have them either. However, it had the experience of reduction of ruble rate and the Central Bank decided to let the Ruble rate go since early 2015. Devaluation of AZN rate has started against the background of this decision, But because of the sanctions closing the way to the western borrowing markets and outflow of Russian capital abroad, devaluation has acquired an epidemical character. The Russian government tries to knock down a dangerous agiotage demand in currency. But at the same time it is ready to use reduction of ruble rate to maintain the budget incomes.

Similar scenario cannot be absolutely excluded for Azerbaijan. But one should bear in mind that devaluation by itself does not do anything. Poland had the most successful experience of devaluation in 2007 on the eve of the financial crisis. Russian currency zloty went down by 1.5 times and Poland almost did not suffer from the crisis. But we know that devaluation in this country would not have a positive effect, if it would have not been supported by other circumstances. Poland had a big local market (which Russia has and Azerbaijan lacks). So, Poland had an energetic national maker able to replace more expensive import. Bureaucratic load on business was rather low. Poland also took advantage of favor of Brussels, which has made the country the biggest recipient of European subsidies with effective system of local self-government, which has spent the subsidies for more advantageous projects. This can hardly be imagined in Azerbaijan and for this reason the government will support AZN rate under pressure of foreign circumstances. Devaluation is also able to support export, but our economy cannot boast of variety of export fields, which would have pushed the government towards this step. One should just wait for the development of events and see if currency resources of the country will be enough for the previous style of government.

We would like to mention what had happened in the financial sectors. Time given to the banks to increase their authorized capital has ended and majority of them managed to do so. It is not surprising for the country, which has money and big private capital. In December 2014 and early this year we have seen how big economic groups purchased shares in the “swinging” banks this way or the other. The results of correspondence of the authorized capital of the banks to the norms have not been announced by CBA yet. But at first glance the current attempt to consolidate the banking system could seem  a rather positive phenomenon. However, it is hard to say what is more advantageous for the economy in the current situation. It could differentiation of the banks and then their specialization would have been more effective? In any case, as has been mentioned earlier, specialized agrarian bank has not been created in Azerbaijan. The situation is the same with the Development Bank. A small Kovsarbank has also become “somebody’s catch”, though for the Islamic banking availability of small specialized banks is very limited. We also do not have construction and saving banks and Pasha Bank is the only bank with the investment profile.

There were no special changes in other fields. In 2014 turnover of the Baku Stock Exchange increased by 1.87% against last year, though during a year the accumulated growth sometimes reached 1.57 times. Last year corporate securities for the first time exceeded the turnover, which was ensured by the state securities. The turnover of 5948 state securities deal increased by 3,2 times up to 4,477,529 AZN. The turnover of 421 state securities deals dropped by 41.1% to 4,156,582 AZN. In 2013 757 state securities deals to the amount of 7,087,500 AZN have been closed and 4,179 corporate securities deals to the amount of $1,388,361 AZN. The repo operations as the main exchange instrument has significantly decreased. The shares ensured 655 primary placement deals to the amount of 1,009,478 AZN against 349 deals to the amount of 423,163,000 AZN and exceeded primary placement of all state securities.

All this new picture needs one big clarification. It seemed like the market was active. But last year there were many big deals at the Baku Exchange (BICEX), which were simply formal. For instance, State Oil Fund (SOFAZ) purchased bonds issued by the State Property Committee to fund TANAP or increase authorized capital of several big state companies. The banks have replenished their authorized capital through BICEX. All these were the so-called closed deals. Therefore, it is too early to speak about growth of the market or its significant reviving. There are almost no new instruments at the market and the intention to sell first IPO in 2014 has not been carried into life as well. Forex market has appeared as a special platform. It has ensure deals to the amount 4.3 billion AZN and increased total turnover of the stock market up to 13 billion AZN. It is good news for BICEX, but insignificant one for the borrowers.

Insurance market has grown insignificantly and it still constitutes only 0.7% of the country’s GDP. During a year 429,2  million (+5,8%) premium has been collected and the potential of mandatory insurance has been exhausted, so now the executive authorities will be responsible for housing insurance. The reason of some stagnation at the market is a very careful policy of the state, which is afraid to introduce such mechanisms of insurance as obligatory medical insurance and on the other hand, the population itself is not rich and does not trust insurance yet, which should be overcome. (End)

Beginning of the article:

http://contact.az/docs/2015/Economics&Finance/020800105703en.htm#.VNiuxvmsVSQ

http://contact.az/docs/2015/Economics&Finance/020900105851en.htm#.VN2hv_msVSQ