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Government disperses panic over unpegged manat

19 February 2015 13:59 (UTC+04:00)
Government disperses panic over unpegged manat

By Gulgiz Dadashova

The current instability in global crude market and economic sanctions against Russia over Ukraine crisis have produced a tangled web negatively hurting regional economies, including Azerbaijan.

But Azerbaijan has been less affected in comparison with other former Soviet states by the economic crisis in Russia, as the country’s share in Azerbaijani exports is small.

Major markets of Azerbaijan are Turkey, Europe and Asia, but the country’s economy depends on oil and this makes the country vulnerable to price changes in the global energy markets.

Azerbaijan, the biggest economy in the South Caucasus, relies on hydrocarbons for more than 90 percent of exports. Meanwhile 65 percent of its state budget is formed on the petrodollars.

The CBA’s recent plan to drop the dollar peg was a key policy shift for Azerbaijan’s energy-export oriented economy.

The Central Bank of Azerbaijan has spent about $1 billion of its reserves since the beginning of 2015 to defend the manat, which has been effectively pegged to the U.S. dollar at just over 0.78 per dollar since mid-2011. The intervention has eaten into its foreign-currency reserves.

Experts asses the decision as timely due to the concerns over the impact of weaker regional currencies, namely the Russian ruble and the Turkish lira, which affect manat's exchange rate.

No worries

The CBA’s decision to stop the national currency pegging to USD sparked panic among the Azerbaijani population. For many, this change means that soon they will have to reduce their "appetite" for purchasing food.

But there is no reason for long-term weakening of the manat, said Elman Rustamov, CBA President, in an interview with the state channels AzTV.

He said the devaluation may occur in two cases: If a trade balance deficit is observed for a long period of time or at a time when the state lacks foreign exchange reserves under the conditions of such deficit.

"Our foreign exchange reserves account for almost 70 percent of GDP and exceed the amount of manat in circulation by nearly 2.5 times. So, Azerbaijan does not expect any devaluation, as it has to respond to the ongoing developments in the globe,” he said.

Rustamov said that a number of states had a sharp devaluation, but in Azerbaijan this is out of question. "It would harm the public, investors and the entrepreneurs, because manat is the only currency for payments in the country," he added.

The chief economist of the country noted that many countries including Russia pursue the exchange rate policy on the basis of the bi-currency basket mechanism consisting of dollar and euro.

"In 2008-2011, during the global financial crisis, Azerbaijan's exchange rate policy was based on the mechanism of bi-currency basket including dollar and euro. This allowed a more flexible exchange rate policy. However, high oil prices and high balance of payments surplus put pressure on the exchange rate of manat. On the other hand, the euro value rose more in comparison with dollar. These factors contributed to the strengthening of manat, and if we did not remove euro from the basket of currencies, today we would have a stronger manat," he said.

Noting that a strong national currency has its positive aspects such as low inflation, Rustamov added that it can also have a negative impact on exports and diversification of the economy.

"So, we removed euro from the currency basket. But today the situation is different: The euro has become cheaper against dollar. Manat rate would be negatively affected by euro because of the recent developments in the currencies' values. Since the euro zone is one of our major trading partners, the current situation could affect our business prospects. So, the Central Bank has decided to restore the euro in the currency basket, "he said.

Rustamov noted that the share of euro in the basket is small, so the additional weakening of euro against dollar will not affect manat. In turn, it gives flexibility to the exchange rate policy of the Central Bank.

Experts assess the decision as quite logical as the country is shifting to an export-oriented economy. In this regard, a very strong manat may reduce the competitiveness of goods produced in the country.

Definitely, Azerbaijan doesn’t intend to allow excessive reduction in the exchange rate of manat to US dollar, Rustamov confirmed in an interview.

Weakening of the currency would be gradual rather than sudden, he noted, saying that the Central Bank would take into account the interests of nation.

The bank hasn’t yet revealed the maximum possible appreciation level of US dollar, however, manat dropped by 0.11 percent in two months. Definitely, sharp fluctuations of the exchange rate of manat will not be observed, since the CBA doesn’t intend to absolutely restrict its presence in the country’s currency market and is ready to buy an excessive amount of the currency from the market.

The basket would probably be split 30 percent in euros and 70 percent in dollars, in line with Azerbaijan's exports. The corridor will be set at a certain level to allow the bank to intervene when it sees appropriate.

The CBA also recommended the banks operating in the country not to interfere in its customers' accounts to convert manat funds in foreign currency. "Every citizen has the right to freely convert the national currency. I want to appeal to the banks that they were attentive to investors, and capable of converting their savings upon first appeal,” Rustamov said.

He said Azerbaijanis' holding in banks is more than seven billion in manat, and half of deposits - in dollars.

He noted that the process of dollarization has been observed in the past two months, and during this period the volume of deposits in dollars increased by four percent.

"There is nothing strange about it. This is a purely psychological factor that occurs under the influence of devaluations in neighboring countries," he said, noting that there are no reasons for a long-term weakening of Azerbaijani manat.

Investment Bank Saxo Bank has assessed the new policy introduced by the Central Bank positively.

John J. Hardy, Head of the Foreign Exchange Strategy of Saxo Bank, said the move makes sense given that Azerbaijan’s dominant export, crude oil, is priced in dollars and because the combination of a falling crude prices and a rising dollar means a double whammy for oil exporters like Azerbaijan that are pegged to the US dollar.

“It is entirely inappropriate for your currency to strengthen when your export income is collapsing by almost 50 percent within just two months,” Hardy said.

He added that it is interesting to see that they are talking about EUR and USD basket arrangement rather than simply managing a decline in the manat versus the US dollar.

“The manat would definitely get weakened and now the question raised is how many reserves the Azerbaijan Central Bank will want to spend on managing the decline. It might be a delicate process if domestic capital feels it is unwise to threaten the local currency. Instead it would prefer to get out of manta-based assets in favour of foreign currencies,” Hardy said.

For his turn, Eyyub Huseynov, Head of the Azerbaijan Free Consumers Union, believes that a potential drop in the manat rate will affect the prices of food and services.

"This will first of all affect the food. Earlier the residents could buy 1 kilo of apples for one manat and in the near future, it would be difficult to find the fruit with the same value in the market. More recently manat was one of the most stable currencies and I do not want to believe that it is devaluated severely. I am convinced that the Azerbaijani government pursues a policy of fixing the rate of manat. So, there is no room for concern," he said.

Vahid Akhmedov, Member of the Parliamentary Committee on Economic Policy said stopping the trend of manat peg to US dollar has been top on agenda of the government for a long time.

To date, the Azerbaijani manat is the only currency in the post-Soviet space, which has not only become cheaper, but, on the contrary, has become even more strengthened in recent years.

But it could not continue for long time.

"If there is a strong jump in the exchange rate of manat, the population will be badly affected and its purchasing power will drop. But I do not think that in the near future, at least until the summer of this year, the dollar can rise very much against the manat. All will be made gradually. Maybe the dollar will rise to 2.5 cents, not more,” he noted.

The Central Bank of Azerbaijan, which introduced the bi-currency basket on 16 February, has devaluated the national currency to the US dollar by 0.14 percent.

The official exchange rate on February 19 was set at the level of AZN 0.7857 to the US dollar.

By early 2014, the official exchange rate was AZN 0.7845 to the US dollar, by early 2013 – AZN 0.7850, by early 2012 -AZN 0.7865, and by early 2015 - AZN 0.7844.

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Follow the author on Twitter: @GulgizD

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