Azernews.Az

By Nigar Orujova

In the current economic situation, Azerbaijan should rebalance its economy in line with the new conditions for long-term macroeconomic balance and stability, as well as create the basic conditions for the transition to the new economy and the implementation of the new economic model.

This was said by Central Bank of Azerbaijan Chairman Elman Rustamov at the plenary session of the Parliament during a discussion on the draft state budget for 2016 and the subsequent three years on October 13.

He went on to add that this necessity appears due to the fact that in 2014, the global economic crisis has entered a qualitatively new stage.

“The crisis that started in the financial sector has transformed into a cyclical one and is of structural nature. The global crisis has expanded in depth and perimeter, covering developed, and lately developing countries, including China’s economy,” said Rustamov.

At present, the global trade and economic activity remain at a low level, he said, lower prices are observed at the commodity markets, trade, monetary and exchange rate wars have increased.

“Azerbaijan's economy is quite deeply integrated into the global, and today the foreign trade in goods and services accounts for 80 percent of GDP of the country,” Rustamov said. “Therefore, the impact of the global crisis on the economy of Azerbaijan is considerable, and it is multilateral. The main influence is a major decline in oil prices. The historic highs in 2008 of $140 for black gold has fallen in price three times, and twice in last year,” said the head of the CBA.

As a result of a serious decline in oil prices, the current account surplus in the Azerbaijan’s balance of payments declined in 2014 to $10 billion (compared with the maximum level of $17 billion in 2011), and at the end of 2015, this figure is expected to drop to two billion dollars, indicating a decrease of eight times, he said.

“This is connected with a decrease in oil prices,” said Rustamov.

As the head of the CBA noted, during the seven years of the global crisis, Azerbaijan has maintained its investment rating, despite a characteristic reduction or change in the ratings in neighboring countries.

Rustamov noted that the 2004-2014 years were entered into history as the ‘golden period’ of the formation of economy in Azerbaijan.

As a result of measures taken, Azerbaijan was less affected by even the critical phase of the economic crisis in 2008-2010. During this period, with an average annual growth of the global economy at 3.3 percent, Azerbaijan’s domestic economy grew by an average of 5.1 percent, which includes growth in the non-oil sector amounting to nine percent.

“In the new economic situation, Azerbaijan is facing new conditions and challenges, which can be divided into two parts, namely balancing the economy and the formation of the basic conditions for transition to the new economy and the implementation of a new economic model,” said Rustamov.

“Reserves of the Central Bank of Azerbaijan have decreased due to the high level of dollarization of the currency,” Rustamov said.

He said the currency reserves of the Bank amounted to $15 billion in 2014. “We have received these reserves from the domestic market. After the devaluation, first we received dollars from the domestic market in May and June. In July, the level of dollarization rose again. The current level of dollarization is at the level it was 10 years ago.”

Rustamov said that at present, the currency reserves stand at $7 billion and this figure is in line with international standards.

The issue of transition to a flexible exchange rate policy is being studied seriously, he said. “The transition to this policy requires technical training, and a cold-blooded approach. In this regard, we are discussing with international organizations. The rate of the manat is determined by the price of oil, the balance of payments and monetary policy in the partner countries.

“The same will be true of 2016. As you can see, the key factors affecting the exchange rate are formed outside of the national economy. The issue of a flexible exchange rate policy has long been on the agenda of the CBA, it seriously studied and discussed with international organizations.”

Central Bank sure of Azerbaijani bank solvency

According to the results of stress testing in the banking sector conducted by the Central Bank, banks will be able to maintain their solvency even in the most pessimistic scenario, Rustamov said.

“The capital adequacy level is the main index of banking sector stability,” he said. “It hits 17 percent in Azerbaijan given the international standard of 8 percent.”

The total capital of the Azerbaijani banking sector has increased twofold during the last year to reach 4.2 billion manat.

He said that sector liquidity indices hit 60-70 percent today, which is more than double the minimum requirement.

“The quality of the banks' loan portfolio is satisfactory,” he said. “Since early 2015, Azerbaijani banks have issued loans worth 7.5 billion manat. “More than 5 billion manat of this is for business loans.”

The share of overdue loans in a total loan portfolio of Azerbaijani banks is 6.5 percent.

The CBA has taken a number of measures to regulate the financial capacity of borrowers to preserve the quality of loans within its authority.

According to a CBA recommendation, since early 2015, banks have restructured about 110,000 loans totaling 600 million manat.

“This mitigated the debt burden of the population,” Rustamov said. “The maturities on loans were extended as part of the restructuring. The interest rates were reduced. In some cases, the banks do not charge any interest for the grace period. I think that the banks must be more active in this process.”

In order to achieve such a financial consensus, the optimal balance should be found taking into account the interests of the banks and the population, he said.

Rustamov said that currently the Central Bank, together with the government, is working to improve mechanisms to increase the sustainability of the private banking sector. In particular, work is being done to improve the Azerbaijani Deposit Insurance Fund and an expansion of coverage is planned.

He said that in 2016, the issue of expanding access opportunities to credit resources would remain in focus in Azerbaijan.

“New initiatives to expand the access of the real sector, particularly small and medium-sized enterprises, to sources of financing will be introduced,” said Rustamov. “An active dialogue on the issue of lowering interest rates will be continued with banks.”

He also mentioned the expansion of mortgage lending among the priorities.

“Until now, as many as 17,500 families received loans worth 700 million manats, and the banks issued mortgage loans worth more than half a billion manats through the Azerbaijani Mortgage Fund,” said the chief banker of the country. “Given the increase in the level of employment at the expense of the real estate, the revival of mortgage becomes important.”

He went on to add that the Central Bank, together with the ministry of finance has prepared a proposal to expand mortgage lending and submitted it to the government of Azerbaijan. Proposals include increasing the volume of mortgage loans and lowering interest rates.

There are 43 banks in Azerbaijan, two of which are state-owned.

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Nigar Orujova is AzerNews’s staff journalist, follow her on Twitter: @o_nigar

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