Recently, USD decline in the world markets actualized devaluation of national currencies in some countries. Moreover, oil price decline increases probability that this devaluation will occur in the oil producing countries. On the background of Azerbaijan’s oil dependency and the devaluation that occurred this year, the devaluation will probably be repeated. However, there are arguments that this will not occur.
Oil price decline reduced inflow of dollar to the oil producing countries and consequently, negative tendencies are formed in the balance of payment (BOP). Due to formation of negative balance on other components of BOP, the BOP may face common negative balance. Azerbaijan just faced such image. Remind that the $6.3 bln-negative balance was formed in BOP during the first half of 2015 and this was mainly caused by decline of export. So the export (on BOP) fell 1.8 times, consequently positive balance on foreign trade slid 2.9 times.
Positive balance in the BOP is traditionally formed by foreign trade, because the balance on other components (especially movement of capital) is always negative. Consequently, Azerbaijan faced negative balance of BOP. However, the impacts formed and caused this have started since the second half of last year and this also includes oil price decline. So, the oil price fell to $50 while it was $100 last year. Consequently, the country received less dollar and this negatively affected the BOP. The situation was increasing the price of dollar in the country, because if there is a stable high demand, the decline of supply causes price rise. In the situation that we are analyzing the dollar is as a good. Taking into account the situation, the Central Bank of Azerbaijan devalued the currency 35% at the beginning of 2015. Otherwise, a large amount of dollar had to be put into the market in order to keep the manat stable. This would only be done by Central Bank of Azerbaijan. Actually, in this case there are two choices – to keep exchange rate of currency artificial through the reserves and devalue the currency. Russia, Kazahstan also faced such dilemma. All of these countries chose devaluation. Russia took more serious step and switched to floating exchange rate. But Azerbaijan reduced exchange rate and keeps unchanged about nine months. But, how?
A factor should be underlined here – main goal of the once and for all devaluation is not only to normalize the current macro economic situation, neutralize deficit in the BOP and other factors, but also to bring the exchange rate of national currency nearer to real exchange rate. In ideal case, after devaluation, the exchange rate of national currency changes around the exchange rate determined as a result of devaluation and no sharp exchange occurs. To acknowledge that this format failed in Azerbaijan and AZN 1.05-exchange rate is far from real exchange rate. This is proved by reduction of Central Bank’s reserves. In February-November, CB’s currency reserves slid from $11 bln to $6.8 bln (1.6 times). This means that Central Bank makes a large amount of currency interventions to the market even after devaluation.
Supposing the demand for dollar was increasing under the affect of psychological factors in March-April (dollar unexpectedly rose, the people try to purchase dollar and etc.), but the dynamics shows that reduction of reserves continues. Central Bank announces that sufficiency of the currency reserves exceeds norms and this is true. But “still”. According to official information, the strategic currency reserves are sufficient for 27-month goods and services. But “still”. If the demand for dollar remains at the simple level and tendencies continue to keep manat stable, the reserves will gradually reduce. In this case, the Central Bank will face second dilemma.
However, there are some arguments to prevent realization of this scenario.
1) According to Central Bank’s statistics, cash dollar purchase by population sharply declined to minimum. Though it’s early to say that this decline is going to be tendency, but this fact is hopeful.
2) International Monetary Fund’s recent outlook says the BOP this year in Azerbaijan will be positive – 3% of GDP. Of course, this is lower than previous years. For instance, this figure was 14.1% in 2014, 16.4% in 2013, 21.8% in 2012. Positive balance should keep the foreign exchange receipts stable.
3) The state budget adopted for the next year is very careful. General expenditures reduced 23%, SOFAZ transfers - 42%. This indicates that general saving mode in fiscal sphere is active and SOFAZ strategic intervention opportunities increased. It’s clear that the factors such as reduction of budget, switching to saving mode, decline of oil revenues will reduce collection capacity of the population. May be this seems abnormally, but decline of collection capacity may reduce the pressure on the currency market, which will lead to decrease of need of Central Bank for currency interventions.
Some countries take more serious administrative measures to reduce the demand for foreign currency. For example, Russia announced that dollar must not used in the domestic settlements. But, this is not obeyed. In Azerbaijan too. Some goods, services are estimated and paid in USD. This increases demand for dollar and purchase of currency. Strict control on this sphere may only give a positive result. For example, the European countries which are not included in Eurozone use national currencies. Of course, these moneys may be exchanged to Euro and USD afterwards. But the this is not needed due to settlement system. Generally, dedollarization of economy and settlements is effective for currency policy.
At the end, let’s note a small factor which may prevent next devaluation. Experts of Bloomberg Information Agency has published list of currencies which may be devalued. The article was prepared on the basis of research conducted across the world. According to the experts, the devaluation may occur in the countries which have close links with Russia (Kazakhstan, Tajikistan, Turkmenistan, Armenia and Kyrgyzstan). At the same time, the countries which have close relations with China also may face the devaluation (Zambia, Malaysia). At last, the dangerous currencies are Saudi Riyal, Nigerian naira, Ghanaian Cedi and Egyptian pound. Azerbaijan is not included in this list. This fact is not so interesting for us, because this is not so hopeful.
Another aspect is interesting. According to the summary of the IMF, Kazakhstan is forecasted to face 3% in the negative balance of BoP (compared to GDP), Tajikistan 7,5%, Turkmenistan 13,6%, Armenia 5,9%, Kyrgyzstan 17,7%, Zambia 1,4%, and Saudi Arabia 3,5%, Nigeria 1,8%, Ghana 8,3%, Egypt 3,7%, and Malaysia 2,2% in positive balance at the end of the year. As seen, one country at risk of devaluation, namely Malaysia expects positive balance. Certainly, BoP balance is not only, even the crucial factor affecting the national currency. For instance, as usual, negative balance is usually observed in the U.S. (it is forecasted at 2.6% of GDP for 2015), whereas this doesn’t interfere with the strengthening of dollar. However, if the balance was positive, dollar would probably rise sharply. 5% positive balance is expected in Russia, but the possibility of ruble volatility and descent is not excluded. In spite of the examples of the U.S. and Russia, the compatibility of the devaluation threat with the negative balance of the above-mentioned countries is not accidental. In this regard, the positive balance in final BoP in Azerbaijan will provide support to manat, increase supply in the currency market and reduce the likelihood of devaluation.
P.S. As seen, our analysis includes nothing about the factor of oil price rise. It is not accidental. It is clear that its rise and reaching $65-70 will solve all problems and remove the possibility of new devaluation of manat. However, there is no any analyst or economist who is able to forecast with arguments the rise of oil price up to $60 in the next year. On the contrary, the main idea is that countries need to get accustomed to $45-50 in a few years.
Vahab Rzayev, APA Analytical Centre
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