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Developing economies face higher hurdles

26 February 2015 20:35 (UTC+04:00)
Developing economies face higher hurdles

By Gulgiz Dadashova

The world is changing rapidly and economic changes are catching up with political decisions.

The fluctuating price of oil and Russia’s surge into Ukraine have contributed towards broad currency volatility and made it to difficult to expect “good” economic performances from developing countries.

Experts have already warned that more dramatic changes are to be expected.

If Saudi Arabia, the world's largest oil exporter, pointed to some positive signs in the global crude market it still falls short of a real recovery and will not make up for the losses energy-dependent countries faced in 2014.

"Oil demand is growing and the market has turned calm,” Saudi Arabia’s Oil Minister Ali Al-Naimi told the press in recent comments. And though prices have indeed risen slightly many experts have said that recovery remains tied up to political will and geo-politics.

Plummeting oil prices have affected most of the entire post-Soviet region. Countries in the region have recorded sharp currency devaluations due to a number of reasons arising from Russia's policy towards Kiev and its subsequent economic difficulties.

The former Soviet states are economically interdependent and heavily depend and rely on Russia to keep their respective economy afloat. Such countries have faced aggravated difficulties.

Azerbaijan - the last survivor

Azerbaijan has faced increased pressure on its currency - the manat, due to declining in energy prices and a slowdown in the Russian economy.

Azerbaijan - the third-largest oil producer among the Soviet nations - devalued its national currency at 1.05 against the dollar, compared with 0.78 earlier, as falling oil prices have put the country’s finances under pressure.

This decision aims to “stimulate the diversification of Azerbaijan’s economy, strengthen the international competitiveness of the economy and its export potential, as well as guarantee stability in the balance of payments”, stressed the Central Bank of Azerbaijan.

Fitch Rating supported Azerbaijan's efforts in handling its inflation problem.

"The Azerbaijani manat rate depreciation will assist fiscal and external adjustment to the lower oil price," Fitch Ratings wrote in its February 26 report.

“The sharp appreciation of the manat's real effective exchange rate as a result of the depreciation in 2014-2015 of the Russian rouble and Turkish lira would, if sustained, have hampered efforts to develop the non-oil economy in Azerbaijan,” the statement read.

However, the depreciation of the Azerbaijani manat will hurt banking sector capitalization, Fitch Ratings confirms. The banks have large numbers of foreign-currency denominated loans and are exposed to losses on short FX positions.

The core of Azerbaijan’s devolution story is that the country’s economy is still dependent on the energy revenues. Since 2011, it had pegged its currency to the U.S. dollar. As oil prices fell, the peg became expensive to maintain. Brent crude, the benchmark grade for more than half the world’s oil, has dropped about 45 percent since mid 2014.

The recent devaluation of the Azerbaijani manat has given rise to uncertainty. But since the Azerbaijani government highlighted the long-term benefits of its sudden policy shift, confidence has been restored. The authorities believe the non-oil sectors will benefit from the ‘corrected’ exchange rate and will boost diversification of exports.

"The manat devaluation and move to a more floating exchange-rate regime is credit negative for Azerbaijani banks," Moody’s Investors Service warned instead.

Standard & Poor’s lowered the outlook on Azerbaijan’s BBB- credit rating to negative on Jan. 30, citing the oil-price decline and pressure on the manat from “weaker terms of trade.”

Most affected economies

Ukraine’s hryvnia has become the worst performing currency, having lost another 11 percent of its dollar value. The National Bank of Ukraine has acted inappropriately when in an attempt to control its exchange rate the central bank began floating the currency and recorded its greatest losses in reserves.

The central bank has imposed foreign-exchange limits on importers in a bid to curb its outflows, Governor Valeriya Gontareva said in Kiev as quoted by Bloomberg.

Kazakhstan has also been under pressure to devalue the tenge currency and its companies have struggled to compete after Russia, the country’s biggest export market, after the value of the ruble dropped by 46 percent last year. Kazakhstan cut this year’s economic-growth forecast to 1.5 percent, based on oil averaging $50 a barrel, compared with a previous estimate of 4.8 percent.

Kazakh policy makers allowed the tenge to devalue by 19 percent in February 2014. The currency, which has traded in a band around 185 per dollar for the last 12 months, weakened 0.2 percent to 185.28 as of 6:45 p.m. in Almaty, Bloomberg reports.

Former Soviet republics, including Belarus, Tajikistan, Azerbaijan, Turkmenistan, Georgia and Moldova also devalued their currencies as they tried to adjust to the ruble’s decline. The fate of the currencies of Georgia and Azerbaijan are less extreme, compared to the fate of Armenian dram.

Devaluation of the Georgian lari started in November 2014 and so far the value of the local currency has depreciated by 30 percent. The exports of Georgia, with less than $2.5 billion in foreign reserves, in January were 20 percent lower than the year before.

Georgians held a protest rally on February 25 to call for the resignation of the Georgian government due to the sharp depreciation of the national currency.

The central bank of Armenia, which emerged to be the most Russian dependent country of the South Caucasus region, has raised its refinancing rate 3.75 percentage points in two months to stem the dram’s 14 percent decline against the dollar in the past 12 months.

The financial turmoil in Armenia is threatening almost all people, from the authorities to ordinary citizens. The weakening position of the dram and a fall in exports by 30.4 percent after joining the Eurasian Economic Union could herald a further economic collapse.

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Follow the author on Twitter: @GulgizD

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