Azernews.Az

By Gulgiz Dadashova

The declining oil prices have created a number of financial problems for energy-revenues- backed economies including national currency devaluation.

Azerbaijan, whose state budget dependence on oil revenues is 65 percent, has once showed its ability to ensure a strong economic ground for further growth of the economy successfully overcoming the 2008 global economic crisis. Azerbaijan has survived the global financial and economic crisis with minimal losses compared to other countries of the former Soviet Union.

Expert Samir Aliyev said one of the main criteria for the country's economic stability was its ability to keep the national currency rate stable, as well as to provide a stable rate of economic growth while preserving stability over the medium term. Azerbaijan was able to limit the rate of inflation and rid itself of sharp fluctuations in currency value.

“The Central Bank of Azerbaijan took the risk and kept the rate of manat stable. The risk paid off later,” he said.

However, Aliyev said the current situation also poses a danger to the national economy." The first reason lies in lower prices of oil,” he noted.

Brent crude for January settlement fell 3.1 percent to $67.96 a barrel on the London-based ICE Futures Europe exchange on December 1, the sixth day of losses. Experts predict a further decline in oil prices following OPEC, the cartel that supplies about 40 percent of the world’s crude, left its oil-output target unchanged on November 27.

Now some experts argue that the prices have dropped to reach the lowest level predicting that the crude market will itself manage oil supply and dictate prices. The United States expects the oil prices to decrease to $50 a barrel, at a time when Russia expects an oil price drop at the level of $70-$80 a barrel.

Aliyev also doesn’t exclude the possibility of declining oil price to $50. "In this case, manat will face strong pressure. The pressure is observed since September. For example, in September, the Central Bank's foreign exchange reserves declined and the trend may continue in future,” he said, noting that the reason is the fall of oil prices.

"The fall in prices means that the energy revenues have declined. As a result, automatically the share of manat in the market is raising," he said.

Aliyev said the manat will keep its value till late 2014. "In the future, everything will depend on the price of the "black gold”. If oil prices continue to fall, the central bank can’t withstand the pressure and will go for a soft lowering of the manat rate. In any case, one should not expect the devaluation scenario of Russia and Kazakhstan in Azerbaijan. Even there might be a small decrease in the rate of manat,” he concluded.

Vugar Bayramov, Chairman of the Center for Economic and Social Development, shared Aliyev’s views.

He said, all in 2015 will depend on the coming of petrodollars. “Currently, over 90 percent of the country's exports accounted for petroleum products, which are sold in US dollars. If the price of oil continues to fall, the central bank will be forced to go on a soft devaluation or currency intervention. But in any case, at least no decline is expected in the rate of manat for the next six months,” Bayramov said.

Earlier CBA President Elman Rustamov said foreign currency reserves that are at the CBA’s disposal have increased by more than six per cent over the past four years amounting to about $15 billion. “This figure is much higher than manat money supply in circulation. The Central Bank has the ability to convert the entire mass of manat in circulation. This is one of the solid foundations of the Azerbaijani currency stability," Rustamov said.

Rustamov noted that currently the rate of manat is completely stable. "Manat presents itself as a very strong regional currency. Different states use it in trade with various countries. We believe that by late 2015 and beyond that the stability of the national currency will be ensured," he noted.

The International Monetary Fund earlier announced that risks arising from low oil prices are mitigated in Azerbaijan in the short term by reserve buffers.

“The exchange rate remains the anchor of monetary policy, supported by ample reserves. A gradual move towards exchange rate flexibility would foster financial market development,” the IMF October mission report reads.

Rate in figures

The CBA, which is in charge of regulating the size of nation's money supply, availability and setting the cost of credit and the foreign-exchange value of its currency, was committed to maintaining the stability of the national currency and creating a balance in the currency market in 2014.

The bank carried out a sterilization process of currency in the amount of $1.2 billion in January-September 2014 with a view to prevent significant consolidation of manat, and thereby eliminated the negative impact on the competitiveness of the non-oil sector, according to the CBA data.

“The CBA has continued the exchange rate policy in 2014 within the framework of bilateral targeting of USD/AZN rate,” the CBA report reads noting that the supply exceeded demand in the reported period in state of a surplus of the balance of payments on the currency market, and that helped consolidate the national currency.

Since early 2014, AZN rate versus USD rate has not changed, consolidated by 0.03 percent.

The dynamics of the nominal bilateral exchange rate of AZN has influenced the change of the dynamics of the real bilateral exchange rates. During the reported period, AZN consolidated both nominally and really in relation to the currencies of the Eurozone, Russia, Ukraine, Kazakhstan and Israel. AZN was cheapened against the currencies of the United States, Turkey, Georgia, Iran, UK, Japan, China, Belarus, South Korea and Switzerland.

In January-September, the nominal effective exchange rate (NEER) of AZN on the non-oil sector in the total trade turnover rose by 10.5 percent. Consolidation of NEER by one percent leads to lowering of prices by 0.28 percentage points, according to the model estimates.

The difference in consumer prices had a downward pressure on the real effective exchange rate (REER). During the reported period, REER on the non-oil sector consolidated by 4.6 percent.

The official exchange rate stood at 0.7844 AZN/USD on December 1.

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