European games give way to economic problems (extension)

There are no visible threats to the financial sector, though the short-term forecasts are getting worse.

The Central Bank of Azerbaijan (CBA) keeps the re-financing rate at 3.5% without the signs that it could change. The currency resources of the country have stabilized and they cover seven months of import. They have even increased in the past two months. The average capital of the banking system totaled 99.4 million AZN. Some experts believe that adequacy of the banks’ capital in the country could go down by 2%, because of re-evaluation of assets in foreign currency after devaluation. But in this case as well adequacy of capital will be 3% higher, than a minimum demand of 12%. It is also expected that a specific weight of the problematic credits in the aggregate credit portfolio will increase from 11.4% in 2014 to as minimum 15% in 2015.

Right now the CBA is more involved in solving current problems, in particular struggle against dollarization of the economy. The volume of deposits of physical persons in national currency went down by almost half. After devaluation the population has converted a significant part of  its deposits into hard currency. But the population’s deposits in the banks after devaluation decreased by 4.3%.

During the previous months the interest rates of the USD deposits have gone down significantly. Right now they are between 2 and 8%, though recently they were 14%. In Capital Bank the interest rate is between 2% and 6.5%, in Access Ban – 3.5% and Yapicredit Bank – 2.5%. At the same time the cost of manat deposits varies between 12% and 14%. The population is urged to deposit money in the national currency manat.

Unlike Russia, Azerbaijani banking system has access to the foreign borrowings. The devaluation in February has increased the volume of foreign obligations of our banks. From January to May credits and securities in the currency equivalent to over 3,066,000,000 AZN have been borrowed from abroad. By May 1, 2015 foreign obligations have changed – in April they decreased by 207.6 million AZN (2.83%) and since early year increased by 43% and totaled 7,130,500,000 AZN by early May. International Monetary Fund (IMF) has offered to strengthen the budget classification and distribution of the international investment positions, hoping that this will help politicians and investors to make more grounded decisions. CBA does not provide the data of the investment position at all, though it was not a secret in the past.

Meanwhile, there could be problems with foreign borrowings. The change of forecast for the Azerbaijani banking system from stable to negative by the Moody’s rating agency could complicate the banks’ access to the credit resources abroad. It is expected that other rating agencies could revise the forecasts of the country’s banking system. It will be worse if credit ratings of separate banks start going down. There were the similar evaluations of several main banks of the country. This could eventually lead to expensive foreign credit resources.

It is clear to everybody that one of the main reasons of worsening of situation in the banking sector is reduction of oil incomes of the country. But this does not remove from the agenda such an important issue as the bank supervision.

After the scandal with the “credit oligarchs” one question arises – what did CBA do, because it is in charge of monthly supervision of the banks’ condition? It is even worse if CBA knew about it and kept silence. For this reason the international financial institutions offer to accelerate privatization of IBA. Head of the IMF mission Radj Almarzogi made it clear that IMF insists on restructuring of the IBA on the basis of the international principles to ensure reduction of the bank. Then should follow its transparent privatization. “If CBA allots subordinated credits to IBA, then it complicates control over the bank,” IMF believes. The same could be said about the mortgage crediting, which has been undergoing serious tests. The banks do not want to take risks and they decided to increase the initial mortgage fee from 15% to 50%. This has negatively affected the housing market just like introduction of the property sale tax, where many issues are not clearly mentioned.

Our CBA occupies the wait-and-see position as usual  and uses the inflation targeting as a cover. This how many Central Banks act on the post-Soviet space. They wait for the government to start structural reforms and then they start strengthening of the monetary and credit policy in the country. But the CBA policy is a component of the economic policy of the country. Central Bank is the only financial regulator in the country and it is able to contribute to growth of economy. In particular, the key task of CBA is not simply control over inflation, CBA must contribute to the consumer growth in the economy without increasing inflation. The problem is that the costs and savings should grow at the same time. The Central Bank has the goal of the next stage. The main instrument of the monetary policy should be the interest rate and intervention at the currency market should be reduced to minimum and used only for smoothing out very strong fluctuations of the course. Right now CBA is unable to cope with a simpler task – consolidation of the banking system – postponing it till later.

Baku stock exchange shows some animation. Its turnover has been growing and for the first time the securities market has a full package of legislative acts related to its development. In 2014 turnover of the stock market of the country has reached an impressive size and totaled 13.2 billion AZN significantly exceeding the record turnover of 2009 of 8 billion AZN. The correlation of the Baku stock exchange’s turnover to the gross domestic product (GDP) of Azerbaijan constituted 21%. But  one should not be carried away. Although growth of corporate bonds was significant, growth of auctions at the stock exchange was actually ensured by Forex sector, which gives nothing to the financial servicing of the economy. But even under these conditions last year non-oil GDP increased by 7%, but growth of the stock market remained within one 1%.

The sixth Azerbaijani International Insurance Forum (AIIF-2015) organized by the local Association of Insurers through the financial support of the Azerbaijan Finance Ministry has recently ended in Baku. The most important achievement of the event was the decision on the necessity of the state support to the agricultural insurance, which was reflected in drafting of the law with involvement of the best foreign experts. The ideas to consolidate this market have been expressed, but this will hardly happen before consolidation of the banking system.

In general the financial system must quickly leave the current apathy and partial amnesia. Only this way one can explain why all talks about private investment funds, private pension funds and the accumulative pension system have been abandoned.


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