The government failed to prevent Holland disease (extension)

Devaluation of manat has partially solved the problems of the budget and maintenance of the strategic currency resources of the country. However, the first one third part of the years has shown how important it is to preserve stability of the entire financial system. It has been subjected to serious tests. After February 2015 the dollarization of the economy has started. It has shown itself in a sharp growth of the currency trades and growing share of US dollars in the population deposits. In the past share of the manat deposits exceeded the currency deposits as twice and now the situation is absolutely the opposite. (see Attachment). This is connected with the devaluation expectations of the population. There have been problems between the borrowers and the banks. The devaluation expectations have another quality – it is getting more comfortable to take credits both in US dollars and AZN.

After devaluation the currency borrowers of the banks counted on conversion of their debts. However, on May 15, 2015 the Azerbaijan Constitutional Court decreed that the credit debts must be repaid in the currency the credits were allotted at the rate, which was effective during the reimbursement of the loan. The opposition said that this is violation of the rights of owners. But many lawyers believe that in this case the Constitutional Court is right. This could have destroyed many banks.

However, some financial organizations started formation of their own currency baskets. Finance Leasing open-type joint stock company (JSC) has started diversification of its resources – the State Securities Committee has given it the right to issue bonds in the national and foreign currency. They will be issued in approximately the same volume (300,000 AZN and 300,000 USD with the interest rate of 14%). The term of circulation of the bonds is 1080 days. However, as we can see, sale of these bonds will become a litmus paper for evaluation of the current interest in currency.

De-dollarization of economy will not be simple. One cannot ban converting of deposits into currency – this will cause outflow of capital abroad. The best solution here is stimulation measures: strengthening of guarantees of manat deposits, expansion of the investment crediting, preferential crediting in manat and growth of the volume of cashless payments. It is not ruled out that rights of commercial banks to form the currency resources and place them abroad will be limited. The talks about the need in the law on de-offshorization have been resumed. The manat deposits must be more attractive than those in foreign currencies and the work in this direction is in progress. But the main condition for “return” of  manat is the same –growth of real economy.

During quarter 1, 2015 money supply in the country has significantly decreased. (see Attachment). The results will not be noticeable at once, but in time. But as we can see, money supply has already significantly decreased and it is a source of multiplication of money by the banks.

Central Bank started experiencing problems as well. The end of last year was unprofitable for the first time in the past years. In 2013 it had a profit of 280,573,000 AZN, but last year it finished with losses worth 308,734,000 AZN.

At one of the last parliament sessions the Central Bank has urgently introduced amendments into the law on Central Bank of Azerbaijan. The changes were related to the problems of insufficiency of the bank’s own capital. Now the loss, which accumulated by the end of the years, because of re-evaluation of assets and liabilities in foreign currency and gold of the main financial regulator of the country, will be covered at the expense of own capital resources. If the assets go down below the size of liabilities, the shortage of the capital will be compensated after one fiscal year at the expense of issue of securities by the state.

The scandal related to the so-called “credit oligarchs” has revealed many weak sides of the CBA activities. Although it looked as if the CBA, the main supervising agency of the banks, bears no relationship to this story.

Central Bank still believes that its main goal is to control inflation and it tracks a real effective manat rate with the partner countries. A significant reduction of the volume of manat supply in the country should be, probably, explained by the same reason (see Attachment). But CBA is rather indifferent to the problems of economic growth, though the growth is mainly in construction and trade. The current reduction of average credit rates in the country is accounted for a tense situation in the banking system after devaluation (see Attachment). Real rates are much higher. It is not surprising that during 2014 average current rate was significantly higher.

Discussion of consolidation of the banks has become urgent again. Between five and ten banks are named that could fall under consolidation. But consolidation is always delayed, though CBA has many levers to accelerate IT. Early this year the bank announced that it will not withdraw the licenses from the banks that failed to increase their authorized capital up to the required amount. The reason is the same again – CBA does not want to create panic among the borrowers and depositors. This goes against the government’s policy envisaging concentration and centralization of both bank capital and commercial industry. As in the past European Band for Reconstruction and Development (EBRD) again announced its readiness to take part in consolidation of the banks as a partner. Last time such a merger of the banks with participation of EBRD took place in 2005. Asian Development Bank (ADB) has also expressed its intention to take part in the capital of Azerbaijani banks, if it receives an offer.

In quarter 1, 2015 the share of overdue loans in the total credit portfolio of the Azerbaijani banks reached almost 6% exceeding 1.2 billion AZN against almost 854 million AZN during the same period last year. But judging by the latest events, it is really much higher.

The story with the “credit oligarchs” has also shown that CBA cannot cope with its supervising functions. Otherwise it is not clear how it could accumulate such debts. There is also another explanation to that – big credits are allotted by phone calls. But in any case, it was CBA who had to raise the alarm. One can also remember such unpleasant facts of the near past as actual bankruptcy of Bank of Azerbaijan. According to some sources, depositors of the banks cannot get back their deposits, even the part that was guaranteed by the state.

There is also an understanding that the financial market cannot keep on further developing without the stock market. At the end of May 2015 Azerbaijani parliament passed the draft of law on Azerbaijani securities market in the second and third readings. The law has been worked out to execute the state program for development of securities market for the period between 2011 and 2020 approved on May 16, 2011. The law defines mid-term perspectives of Azerbaijan to ensure quality and quantitative development of the securities market, protection of investors’ rights, ensuring differentiated access to the financial resource and expansion of the financial services.

According to the law, CBA was given the right to invest into the securities market and securities trade will be done only in the electronic form.  Only licensed participants can provide professional activities at the market. The market specialists believe that the law is full and now it is the matter of real execution of the law.

The market has been developing lop-sidedly. There are almost no notes and state short-term bonds. Issue of bonds by the Ministry of Industrial Development, which is paid by State Oil Fund of Azerbaijan (SOFAZ), ensured 60% of the bonds market. The lion share of the market is ensured by the derivatives, which is actually forex. The law opens the possibility for changing of the situation. One can say a word about EBRD and ADB again. They have both constant contacts with the government and also understanding of where to direct the efforts for the use of the country. In order to animate the stock market, EBRD is going to issue Euro bonds, which could be purchased by local and foreign investors. ADB is planning to break into our stock market.

Execution of the budget for fiscal year 2014 was discussed in May 2015. Its incomes totaled 18,400,565 AZN, while expenses – 18,708,999 AZN. The time of budget proficit seems coming to the end. In quarter 1, 2015 3.9 billion AZN was transferred to the budget, while 4.2 billion AZN has been spent. The budget deficit totaled 251 million AZN or 2.2% of GDP. The budget demonstrates the investment orientation. 2.1 billion AZN has been invested into the economic development, 522.1 million AZN into social security and 387.6 million AZN into education and health sectors.

Start: http://contact.az/docs/2015/Economics&Finance/060600118496en.htm#.VXmfVvntmkp

http://contact.az/docs/2015/Economics&Finance/061000118884en.htm#.VXmey_ntmko

http://contact.az/docs/2015/Economics&Finance/061100119036en.htm#.VX0Fp_ntmko