By Gulgiz Dadashova
EBRD Baku Office Head, Neil McKain shared some of his insights with AzerNews on the eceonomic situation in the country.
Question: What can you say about the current position of Azerbaijani economy? How do you assess current economic situation in the country in view of the devaluation of the manat earlier in 2015?
Answer: I think the fundamentals of Azerbaijani economy are good - the fiscal position is excellent with $37 billion state oil fund and over $12 billion foreign currency reserves. That is a big plus for the economy. If you look at the currency graphics against the USD (all regional currencies including), it used to be hard to see AZN, the national currency of Azerbaijan - manat, on the graph. It actually looked like it was part of the grade lines - it was all a straight line. But then we had this devaluation - 34 percent in late February, and it changed the whole dynamic.
I think that in the long-run it will be something positive for Azerbaijani economy as I believe the manat was overvalued and it needed to be put back on par with reality. This overvaluation was stifling the development of the export sector, which we all want to encourage. Our country strategy, I mean EBRD country strategy runs in parallel with the government' strategy for diversification. The devaluation of the manat made our work much easier in the sense that exports were given an incredible boost - products became more attractive.This is the sort of change which we have yet to feel.
But what you have to realize is that in the short term, people will need to psychologically adjust to seeing the manat experience more volatility. We went from a straight line - complete security, to more fluidity and movement. It will take time for people to get used to things. But it is actually more normal for a currency to be mobile - it is not instability, not volatility, it is changeability.
Q.: Then do you regard the devaluation of the manat as the opportunity to grow?
A.: Yes, it is especially true in the case of the export market. There are few exports coming out of Azerbaijan outside oil and gas - both make the vast majority of all exports. But there is real potential in other sectors: food products, light manufacturing or petrochemicals and so on. It is much easier for them to export and now compete with imports. It will be much easier to compete with imports because imports will be more expensive. That means that local manufacturers will benefit from the devaluation of the manat.
It will also benefit local Azerbaijani industries in the non-oil sector as well. On the whole, it is good for the non-oil sector development.
Q.: How does it affect the investment environment of the country? Do you think foreign investors will leave the country because of the devaluation?
A.: I don’t think so, no. I think if an investor is already in Azerbaijan, he or she will take the long view. Investors will also be encouraged by the change in the currency regime. If you are looking long-term, as investors do, you are not looking for the next six-eight months, you are not thinking whether or not there will be another devaluation, you are looking for a much longer period of time - five years or more. That is why I don’t think investors will be discouraged by that [devaluation]. Again, depending on what sector they are in, of course. A lot of our clients have perhaps slowed down their investment plans a little bit. They said let’s wait and see how it all plays out, which is a perfectly normal reaction by the way. So, perhaps this year we will have a slight slowdown in business. But that business is not going away.
So for us as investors, we are working hard to fulfill our business plans for this year and I think we will get there. But we are not going to move forward as quickly as we were last year. And only because our clients want to wait and see a little bit, they are a bit cautious and more conservative. Whenever there will be an economic shock such a devaluation, investors will slow down and re-evaluate - this is normal, this is actually a healthy reaction.
Q.: What are some of the biggest challenges for the banking sector today? How do you see the future of the banking sector?
A.: I think challenges for the banking sector is to develop capital markets. Azerbaijan’s banking sector is still small. One of the ways we measure the size of the banking sector is to compare the assets of the sector as a whole to the GDP. They call it bank penetration rate. Here, it is about 34-35 percent. For comparison, if you look at a country like Georgia, right next door the figure is 65 percent. So, this is the difference. The size of the banking sector compared to the whole economy is much bigger in Georgia, which is not as rich as Azerbaijan. And yet it has a much more developed financial sector. So the challenge is I think, the consolidation of existing banks in order to have stronger institutions, better able to finance all of the things we want to see banks financing, from micro-financing to corporate lending.
But capital markets development is also needed. At the moment, most banks are financed by deposits or by equity from the owners. There is no other way of raising funds. There are a few bonds here – not many to speak of. There has to be more development on capital markets. So we are working with the Central Bank, with the State Security Committee as well as trying to develop new financial instruments for Azerbaijan. For example, there are no big pension funds here to invest in shares on the stock exchange. But there is also no other capital markets to invest in. Banks don’t lend each other as well. This means banks hold very high level of liquidity, they fight for that liquidity because they have to maintain this high position as they can’t borrow from each other to cover open positions, they don’t do that. So they hold high levels of liquidity. That means there is a lot of competition for liquidity and that is one of the reasons why interest rates are still high. The good thing is that there is now a good spread between the dollar and the rate of the manat - which is more market reflective and therefore good. But still interest rates are high. It is still expensive for local business people to borrow from banks and if you have to have a better local capital markets that will increase competition and drive down the costs. So it will be cheaper to borrow. Not just cheaper to borrow for consumers but most of all for companies.
Q.: What about new tools? EBRD President Suma Chakrabarti recently announced Bank’s intention to issue bonds in manat. Have you defined the size and timeframe?
A.: No, we have not yet defined the volume. We are looking at the regulatory environment at the moment to see what can be done; we are coordinating with the World Bank program [the Capital Markets Improvement Program] trying to look thoroughly who might be interested in buying EBRD papers and that is not clear at the moment. And mainly because everybody wants manats at the moment. We have to see if there is anybody who wants to give us manats. That I really don’t know.
As for the time-frame, we don’t have an exact date. We would hope to do this in 2015 if possible. I think this is realistic. But, if that goes to next year, that is fine. We don’t know enough about the local regulatory market and market interest in EBRD manat bond in order to put it in a timetable yet. But by the end of the year, we hope we will be able to.
Q.: Decreasing oil prices already showed its effect on Azerbaijan's energy-oriented economy, do you think the non-oil sector will be able to compensate against it?
A.: Fully not yet. But there are prospects for that and I think the last few months gave us a taste of what needs to be done in order to develop the sector. What we know is that companies need to access to finances, there has to be more transparency and governance in companies has to improve. Also issues around corruption and good governance need to be addressed in order to increase competition. And that is the second point of our EBRD country strategy - access to finance through creating competition in the financial sector, which then creates more competition in the non-oil real sector. So we are not there yet. I don’t think the non-oil sector can fully compensate for the oil revenues, we know that. But it is gathering momentum every year, and every year we see that the non-oil sector growth is greater than the overall economic growth. That means the non-oil sector is catching up. I’m very optimistic that it will catch up and that devaluation will allow it to accomplish it faster.
Q.: Recently the EBRD voiced its intention to finance the agriculture and IT sector. Does the Bank have exact projects to invest in agriculture and IT? May EBRD invest in renewables also?
A.: We don’t invest in renewables, but we invest in energy efficiency. It’s like the twin brother of renewable energy. That is a very important project – Energo Credit Project. We lend money to four local banks, so far and they lend it on to SMEs to improve their energy system. So it might be the purchase of small equipment – manufacturing equipment which is much cheaper to run and to use less electricity. It might be insulating a building, it might be changing the light system of a small businesses. This is a very good for banks to do because you are not asking your client to do anything, you are not finding something new or risky, you are just being more efficient. And bankers like that because that is not risky and payback is relatively quick. So that is one area we are working on – energy efficiency.
We are working on new Azerbaijan agriculture finance facilities – we lend money to banks which in turn lend to small farmers and small food producers as well. We hope to have this up and running this autumn. We are recruiting a consultant now to run the program. That should be ready by October. We hope loans could be made then.
In the agriculture sector, we are engaged in extending loan agreement and we offer a lot of technical assistance to farmers. We are helping farmers to improve their yields to get more crops and helping them in market- to sell, as well as helping group farmers in a club in order to sell.
We will also continue to operate direct lending and we see a lot of equity prospects as well. As I have mentioned before there are a lot of good equity prospects. So we are not just lending we are buying shares – so we are looking to buy shares in manufacturing, retail sectors and perhaps in banks.
Q.: Could you name the projects?
A.: I cannot give too many details, but I can say that until this year there were not so many opportunities for us in equity but we see some now. As for the timeframe the talks may continue into next year.
Q.: Could you please share case studies or few examples with us that you find particularly interesting, you are proud of and are reflective of the changes occurring in the country’s business sector - with the help of the EBRD.
A.: We are proud of our clients. It is never us who do anything; all we do is provide financing or advice. So it is never really us. We feel a little bit like a manager of a football club. We are not scoring goals, that are the players' job – our clients are doing this. But, we are creating the right conditions for them to grow their businesses. If we take, for example, Embawood [Azerbaijan's largest furniture manufacturer] - this is a client which went in three years from being a mid-size company to a strong international manufacturer with a presence in Georgia, Kazakhstan and Ukraine. Now, the company sells its products in all these countries, as well as in Azerbaijan. And that makes me very proud! And if we are looking at case studies, then Embawood story is a really great story about what can be done in Azerbaijan by clever Azerbaijani entrepreneurs, building an international business more or less from nothing. The same thing can be said of the Gedebey Mineral Sulari [one of the leading bottled water producers in Azerbaijan]. In just 6-7 years they've gone from nothing to being a really big producer.
The EBRD has already allocated 2.33 billion euros to finance 156 projects in various sectors of the economy in Azerbaijan since the beginning of cooperation in September 1992. One of the EBRD’s main tasks is to ensure the stable development of Azerbaijan's non-oil sector by investing in small and medium private enterprises.
Azerbaijan, the largest recipient of the EBRD funds in the Caucasus, is also one of the largest recipients in the CIS and Eastern Europe. Last year, the bank invested 238 million euros in the implementation of 21 projects.
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