Financial system of Azerbaijan will be reconstructed

It seems like the financial system is going to change. Until now big money coming into the country have created the conditions when there was no need in serious radical decisions. Central Bank of Azerbaijan was very cautious, trying to avoid any risks. During the crisis assistance of the banks through the centralized crediting was not very high, not to cause problems to the Central Bank. The country still has enough currency resources to pursue risk-free policy.

The payment balance of the country during six months shows that it still has a good store of proficit. But it is clear that the proficit will keep on declining. From January to June 2012 Azerbaijan exported oil and gas products to the amount more than $16.2 billion, down $1.26 billion or 7.2% against the same period in 2011. The share of oil and gas export constituted 94.1% of total volume of commercial export of the country, down 1.6% against previous year

According to the payment balance of the country, during this period of total volume of oil export $14.8 billion ($15.9 billion during 6 months, 2011) or 95% fell to crude oil and $805.3 million to the oil products. In the crude oil export structure cost of oil produced by Azerbaijan International Operation Company (AIOC) totaled $13.9 billion ($14.9 billion). During this period other companies of the country export oil to the amount of $908.1 million ($914.3 million), of which $839.1 million ($862.9 million) by the State Oil Company of Azerbaijan (SOCAR). During 6 months, 2012 gas export totaled about $605 million ($765 million during the same period in 2011). Import of products of investment destination declined in foreign trade, though growth was expected here, because of revival of industry.

From January to June 2012 tourism services to the amount of $1 billion were provided for the foreign residents. This is up $483.3 million or 93.5% against the same period last year. The volume of tourism services provided to the Azerbaijani residents abroad increased y $490.8 million or by 69.2% up to $1.2 billion during this period. Of this amount 63.2% was spent during private foreign trips.

The volume of investments of Azerbaijan abroad has increased. This will, probably, negatively affect the payment balance, because incomes from investments will not be derived immediately and they could just partially cover the declining proficit.

Central Bank (CBA) reported that during 6 months, 2012, as in 2011, number of borrowed foreign credits (not considering other investments) exceeded repayment of the earlier allotted loans. CBA reported that by July 1, 2012 Azerbaijani borrowers paid $1133.5 million for the earlier allotted credits. 41.6% of payments ($471.3 million) fell to the banks, 13.3% ($150.7 million) to the loans allotted under security of the state, 35.2% ($399.1 million) to the oil and gas industry and 9.9% ($112.4 million) to other enterprises and firms. Net borrowing of credits totaled $1913.4 million.

All these post-crisis years CBA almost did not react to weakening or strengthening of the US dollar rate. Since early year AZN went up by only 0.1%. CBA also did not react to the constant changing correlation of the Euro and USD, especially as USD was prevalent in the CBA currency basket.

For the oil producing country, 94% of which is oil and oil products, this is normal. But seems like stability of the currency rate shows stability of the whole system. But the situation is different. Currencies of many developed countries could change very often, but their financial system is still trusted. Budget deficit or huge debts of the country do not affect the investors’ behavior. This is the showing of a strong economic system.

In July 2012 the turnover of cashless foreign currency operations totaled 2674 million AZN ($3.4 billion), dropped by 16.6% during a month. During 7 months, 2012 the currency turnover totaled 17.9 billion AZN. It increased by 35.6% against the same period last year.

There were also changes at the currency market. In July 2012 USD has lost its dominating position at the market. The share of trades with USD constituted 34.1%. Specific weight of operations with Russian ruble increased up to 36.6% and 6.6% of the market fell to Euro. From January to July 2012 total turnover of cash exchange operations with USD increased by $2735 million or 68.8% and totaled $6709 million against the same period in 2011. During the same period total turnover of cash exchange operations with Russian rubles and English pound sterling reached 4867 million and 15.2 million, respectively.

During 7 months, 2012 the volume of operations with Euro totaled 1154 million, up 48.7% against the same index of last year. The volume of purchase of this currency by population dropped by 34.1% in July 2012.

Reduction of Euro exchange rate against AZN in July 2012 has become unexpected. It dropped to 0,9704 AZN per Euro, or the lowest level since 2005, which will cause reduction of prices for goods and services sold in Euro. This was hardly dictated by the market. Most likely CBA thought that share of Euro in its basket is insignificant and its cost in the country could be knocked down.

The bank system, which has foreign capital, is not open enough to effectively affect the entire economy. During the past decades Turkey has opened its banking sector for the foreign capital, first of all European one, which has led to a rapid growth of export to the European countries. Now Turkey actively use foreign investments, including from Azerbaijan, in its industry. However, Azerbaijan does not have such a policy. One can hope that consolidation of the banking sector will eventually lead to a strictly functional division of the banking system. Various schemes of development are discussed by the banks. For instance, the strongest banks will allot credits for the big projects, the weaker ones will allot credits to the contract operations and the remaining banks will work in retail. It is obvious that even without creation of the Development Bank, something should be done to draw the banks closed to the demands of the real sector. This can include reduction of credit cost not only through the control over a maximum deposit rate, but by other methods. From October 1, 2012 the Russian bank has transferred to a new system of calculation of a maximum bank rates. The combined products will be excluded from the calculation, which was significantly reduce the maximum rate.

The slowed down character of the Azerbaijan tax system also shows that if there is big oil money and such a donor as SOCAR (including arrivals from State Oil Fund (SOFAR)), interest in mobile tax policy goes down. The tax collection is poor. In addition to the official salary, many organizations practice the “envelope salary” to reduce average salary tax. Some companies or organizations have to pay taxes, which are unsubstantiated. Although this is illegal, this still happens. Economists believe that the taxes could be reduced. There is a proposal to replace value added tax by the sale tax. In USA it constitutes about 8%, but can change depending on the product to regulate the market. The social tax also should be changed. Average social tax in Europe constituted 16%. In Azerbaijan it constitutes 22%, which leads to the fact that some businessmen do not want to sign labor contracts to avoid this tax. There is also a proposal to unite pension, insurance and social payments into a single tax. Some economists believe that in some important public areas taxes could be significantly reduced.

The financial system should be adjusted to the constantly changing character of economy. It is not enough just to invest into the non-oil sector, it needs to get tax impulses. The process of consolidation of the banks has started after increase in minimum size of authorized capital by five times. The second thing is flexible currency policy, which opens possibilities for the local products export. This is also a strict control over the budgetary resources. And at last development of financial market in the country. State Securities Committee has become more cautious with innovations, especially as it gets pretty good legislative and grant support. The talks between the Securities Committee and industrial enterprises, which would like to be listed at the Baku Stock Exchange, continue. The banks, which need to increase their authorized capital, will break into the market more often. Even SOCAR announced its intention to break into the market of corporate bonds. Development of the stock exchange as an alternative site for borrowings is inevitable.

Turan Analytical Service