The future fate of the manat is associated exclusively with oil prices

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-Natig bey, the oil price in the world market is falling. What is the reason for the decline in oil prices this time?

- The main reason for the fall in oil prices in the world market in recent weeks is the coronavirus, which has spread worldwide from China. This is one of the key factors in the economic slowdown in the world. There are some areas where there is already a sharp decline in the activity. For example, there is a 35% drop in air transportation and tourism worldwide. This is a fantastic figure. In general, during the last month, the world economic growth rate fell 0.4 - 0.5 percent. This is a figure that can be expressed with tens of billions. The decrease in economic activity also reduced demand for oil. Because China is the second-largest consumer of oil in the world. Oil consumption in the world and in China has sharply declined. Over the past month, car sales in China have dropped by more than 80 percent. There is a massive decline in the Chinese economy. Therefore, it has reduced the demand for oil. As a result, a significant drop is being observed in oil prices. There are other economic reasons too. There is also a sharp increase in oil production in the United States. It also has implications. But the main effect, of course, is that the new virus, which has spread worldwide from China, has led to a decline in economic activity.

- The decrease in oil prices does not become ineffective for the economy of Azerbaijan too. At present, the price of Azerbaijani oil in the market is lower than the price forecast in the state budget. Will it be possible to compensate?

- The oil price in the Azerbaijani budget was predicted as $ 55 this year. It was $ 60 last year. A more conservative approach was introduced this year. But oil prices have already dropped below $ 50. This is lower than the price forecast in the budget. There is no reason to panic yet. Because, since January, the average oil price is still above $ 55. That is about $ 58-59. But if oil prices continue to fall and remain below $ 50, Azerbaijan’s economy will face serious problems. Serious problems will arise in budgeting, in foreign trade, and also in macroeconomic indicators. The non-oil sector of Azerbaijan is so weak that it is not at a level that can offset the decline in oil revenues. But there is about $ 52 billion in foreign exchange reserves. The total reserves of both the Oil Fund and the Central Bank are about $ 51-52 billion. These reserves will allow for some time to offset the decline in Azerbaijan’s oil revenues. However, a negative balance in foreign trade and increased foreign currency inflows can create serious shock waves in the Azerbaijani economy, and the pressure on the manat will gradually increase.

- To what level the oil price will fall?

- Actually, this will be linked to several factors in the world. For example, one of the interesting issues was the OPEC and Russia meeting on March 5 in Vienna. No results were obtained from the meeting held in OPEC+ format. OPEC proposes to reduce production again by 1.5 million barrels. However, Russia is against it. Because Russia understands that OPEC countries and Russia can lose market share by reducing production. Because production in the US, Canada, Australia, and other countries, which are not included in OPEC and do not participate in this agreement, is growing rapidly and those countries can gain market share by replacing OPEC and Russia’s reduced production. Therefore, no agreement has been reached in Vienna yet. And this affects oil prices. The fall in oil prices was accelerated. In addition, the flow of coronavirus news continues to grow. There are reports that more than 100,000 people are infected with the virus, and the death toll is approaching three-digit. The geography of the virus is gradually expanding, and the number of countries fighting the virus is increasing. If it gets a pandemic nature, that is, if it spreads to America, Europe, Africa, Asia, it will result in the economic downturn. This will continue to negatively affect oil prices. If this gets a pandemic nature, Brent oil price may drop below $ 45. But the key question is how often this price will remain. If it lasts longer, it will have serious complications in the world economy, especially in the economies of oil-dependent countries.

- The fall in oil prices, the suspension of border and customs services among many countries due to coronavirus and the reduction of trade turnover have raised concerns about devaluation. We see articles in some media agencies and social networks about this. Do you think there will be a third wave of devaluation in Azerbaijan in the near future? How realistic are these forecasts?

- The level of forecasts on manat in Azerbaijan depends on how the Government of Azerbaijan and the Central Bank conduct their foreign exchange policy. It’s no secret that Azerbaijan has a strictly regulated exchange rate regime for more than two years. That is, the exchange rate does not change. Because it is defined by the Central Bank in a strict manner. The Central Bank has rejected its previous insistence and admitted that there was no floating exchange rate regime. Therefore, the decision on the exchange rate of the manat will be a political decision. Here, the political decision will take effect more than economic factors. At present, we see the weak effects of pressures on manat. But if oil prices remain low for a long time, that is, below $ 50, the pressures on manat will increase. Because the negative balance will be created in the balance of payments, foreign currency outflows will increase, which will increase the pressure on the manat. If this issue lasts for several months, it is not resolved by the summer months and the price of oil does not stabilize and go up, the Azerbaijani government and the Central Bank may decide on at least 10-15 percent devaluation and fall of the manat. The current exchange rate of manat can rise from 1.70 to 1.90-1.95. However, the probability of more severe devaluation is very low. Because the Azerbaijani economy has not been able to absorb the effects of two acute devaluations that occurred in 2015. If there is a big devaluation than 10-15% devaluation, then more serious consequences can be expected for Azerbaijan’s economy. Because there is a very primitive economic model in the country. It is a country heavily dependent on imports. The country imports about $ 14 billion worth of imported goods annually. Local production is low. We also depend on oil for export. It is a country with 92% of oil and oil products and natural gas exports. Therefore, the oil price is a decisive factor for the future of Azerbaijan’s economy and the future of manat. In fact, the manat is just paper oil. There is no other country in the world that is as dependent on oil as Azerbaijan. Oil-dependent countries like Azerbaijan are Venezuela and Nigeria. However, the share of oil and oil products in their foreign trade is not 92-93%. It is 87% in Nigeria and slightly more than 80% in Venezuela. In short, the future fate of the manat in Azerbaijan is purely linked to oil prices.