- As known, Central Bank of Azerbaijan passed a decision onDecember 21 to switch to floating rate. I’d like you to tell us about your expectations from this decision.
- First of all, I can say that this decision will have negative impact on the banking sector because of having high dollarization level. Quality of the bank assets is worsening and will continue. One of the main problems is that the incomes of persons borrowed loans from mid-level banks declined.
Along with this, the banks were to increase their currency reserves on loans after devaluation and this affected their revenues.
According to our predictions, number of borrowers will decline due to delay in economic growth rate. This also concerns individuals. Along with this, purchasing ability of the population will be down, inflation will rise.
Manat devaluation also negatively influenced the banks’ capital. Azerbaijan-based banks’ foreign currency liabilities exceed the foreign currency assets. This is due to conversion of deposits to foreign currency by the depositors. Just that case caused most of banks to face loss after devaluation. Absence of developed market on hedging of accelerated this process.
Switching to floating rate makes volatility of currency inevitable and this will have negative impact on banks which are not able to manage currency risks and have open currency position.
- Can we accept the decision on switching to floating rate as a delayed decision?
- This decision is related to quick decline in oil price. The Central Bank had two options: sharp decline in currency reserves or switching to floating rate. We must also pay attention to that Azerbaijan took this step after neighbour countries. As known, Russia and Kazakhstan also switched to floating rate. Thus, Azerbaijan’s switching to floating rate after these countries supported state budget and increased competitiveness of goods based on domestic production.
- You touched upon the situation in the banking sector. What is the way out of this situation to your mind?
- Several banks have violated requirement on capital adequacy after devaluation. According to our calculations, this index commonly fell 5-6% compared to February 1, 2015. However, the Central Bank assisted banks in this regard.
We are expecting acceleration of consolidation process in the banking sector.
Generally, our forecast on banking sector in 2016 is negative. Quality of banks’ assets will continue to worsen and this will have negative impact on their revenues and capital. Deposits converted to foreign currency will increase or be out of system. The disbalance between foreign currency assets and liabilities will extend.
Most of banks will prefer reduction of loan portfolio because of lack of manat resource base, rejecting to take responsibility for the risk of foreign currency lending and preserving the capitalization performances.
- How can the recent processes affect the sovereign rating of the country?
- This question must be answered by the analysts of this sphere. Azerbaijan’s sovereign rating is at “Baa3”, the outlook is stable. Of course, manat devaluation has positive impact on state budget and currency reserves.
- Various forecasts are being made about manat rate. These rumours are godsend for some speculators. Do you have any forecast about manat rate for near future?
- Manat rate mainly depends on oil and it’s difficult to make forecast about thius. Oil price will clear everything.
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