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Fitch Ratings: Azerbaijan’s GDP will shrink by 2% in 2009

23 April 2009 09:49 (UTC +04:00)

Baku. Vugar Israfilov â€“ APA-Economics. Fitch currently forecasts that Azerbaijan’s GDP will contract by 2% in 2009, with the non-oil sector likely to act as a drag on headline growth.
Reduced economic activity and tightened liquidity in the corporate and SME sectors have already resulted in an increase in loan impairment across the Azerbaijani banking sector. Asset quality is likely to deteriorate further and Fitch believes the areas of highest risk will be loans to sectors which have been hardest hit by the economic slowdown, in particular construction/construction materials/real estate. Although the AZN exchange rate is currently stable, lending in foreign currency, which is notable in some banks, remains a potential source of credit risk in the mid-term.

At the same time, accumulated foreign exchange reserves are currently adequate at over USD6bn, refinancing needs on foreign markets are moderate, and Fitch notes an encouraging recent sign for the local economy in terms of greater support for the oil price. If the Azerbaijani recession turns out to be shallower or shorter than currently forecast, this would likely be supportive for banks’ asset quality and their overall credit profiles.

There has been no sector-wide run on deposits, however, some banks have experienced an outflow of customer funding since September 2008.
To mitigate liquidity risk, the banks have been accumulating liquidity cushions by reducing their loan portfolios.

In addition, IFIs in many cases have rolled over existing obligations or extended new funding facilities and the NBA has already in Q408 provided funding support to UniBank.

Liquidity might come under pressure if deposit outflow picks up, driven, for example, by a sharp AZN depreciation, or if refinancing support is not provided to the banks as currently expected.

However, those scenarios are not at present regarded by Fitch as likely.