Azerbaijan to develop special program for financial stability

By Fatma Babayeva

Azerbaijan's banking sector is under a thorough scrutiny, said Elman Rustamov, head of the country's Central Bank on May 24.

Rustamov underlined that a special program on financial stability will be developed, and then implemented following a diagnosis of the banking sector.

The financial stability program will be developed and enforced afterwards, according to the head of CBA.

"I think Azerbaijan's all macroeconomic structures, namely, the Ministry of Finance, Central Bank and Financial Market Supervisory Body are jointly working to ensure the financial stability in the country by diagnosing the banking sector," he said.

Referring to the opinion of the analysts of Moody's international rating agency that Azerbaijan's banking sector is on the verge of default, Rustamov described this statement as premature.

"It would be better to hold several meetings in Azerbaijan and carefully examine the banking sector before making such statements," he stressed.

Rustamov further added that Moody's delegation will visit Baku in the near future and hold meetings with all macro-economic institutions of the country.

The first stage of restructuring the country's banking sector has been successfully completed.

AG Bank's capitalization has been conducted, he said, adding that together with Azerbaijan's Financial Market Supervisory Body, CBA have solved the problem of the bank's liquidity, and the bank returned to the country's banking market.

The recovery program of another bank - Bank Standard - is being discussed, Rustamov said. "We will disclose this program in the near future," he added.

Hike in FED rate not to impact strongly national currency rates

Although the U.S. Federal Reserve System (FED) has increased the key interest rate. it will not have a strong impact on Azerbaijan's financial market and the exchange rate of manat, said Rustamov.

He noted that the FED's decision is not a fundamental factor affecting the rate of the manat against the U.S. dollar.

Decisions by the FED are not among the main factors affecting the exchange rate of the manat, he said, adding that more fundamental factors are oil prices, dynamics of the exchange rates of Azerbaijan's neighboring country’s currencies, as well as, the state of the payment balance of Azerbaijan which is now quite stable.

The head of the CBA further added that Azerbaijan has very large foreign exchange reserves, and the reserves of the country's central bank are at a sufficient level.

Strategic currency reserves of Azerbaijan amount to almost 100 percent of the volume of the country's GDP, said Rustamov by stressing that despite the decline in foreign exchange reserves of the central bank, they started to grow in recent months and are at an adequate level now.

Rustamov expects that currency reserves will grow before the end of the year.

He noted that in accordance with the global experience, foreign reserves of a country should cover a six-month volume of the imports of goods and services, while in Azerbaijan they cover a nine-month volume.

Strategic currency reserves of Azerbaijan exceed $38 billion, including assets of State Oil Fund of Azerbaijan (SOFAZ) as of amounted to $34.25 billion on April 1, which is 2 percent increase compared to early 2016 ($33.57 billion), and the foreign exchange reserves owned by the Central Bank of Azerbaijan - $4,065.8 million (18.95 percent decrease during the quarter).

Referring to the dynamics of oil prices, which also affect the exchange rate of manat, Head of the Central Bank of Azerbaijan stressed that no sharp fluctuations in oil prices are expected until 2035.

"That was mentioned in a special BP presentation on the prospects of the global energy and oil market, which was demonstrated in the Central Bank of Azerbaijan and other macro-economic institutions," Rustamov said adding that BP’s analysis covered nearly 20 years period.

BP noted that oil price changes will be quite conservative, but aimed at a gradual increase. So no major changes are expected, he said.

More than half (51 percent) of 53 economists surveyed by Financial Times expect an increase in the base rate of the U.S. Federal Reserve System in June or July 2016, while in early May 2016, most analysts predicted the next interest rate hike to take place not earlier than in 2017.

In December 2015, the FED carried out the first interest rate increase since June 2006. Earlier, the rate remained at historically low level - 0-0.25 percent during seven years starting from December 2008.

The next meeting of the Federal Open Market Committee of the FED will be held June 14-15.

Situation of the banking system in Azerbaijan

Banks of Azerbaijan encountered decline in the volume of total bank capitals since February 2015 when the national currency manat devalued by approximately 34 percent against the dollar. The reason for such a decrease was indicated as increased credit burden on the population which led to a surge by 16.8 percent in the number of bad loans.

Some banks merged, while some lost their licenses during this period.

In addition, the consolidation process conducted in the banking sector of the country is believed to stabilize banks which have deliberately decided to merge.

The exact amount of bad loans of the International Bank of Azerbaijan (IBA)- which is the largest bank and financial services group in Azerbaijan and the region- will be determined as soon as the Financial Market Supervisory Body (FMSB) finalizes the classification of loans in this bank.

The IBA began negotiations with Bank Standard in order to merge their assets within the framework of the plan on consolidation of Azerbaijan’s banks.

Recently,the Azerbaijan government has taken some measures to shore up local banks with liquidity issue, which encounter problems in dealing with short term loans.

Currently, 37 banks and more than 700 bank branches operate in Azerbaijan.

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Fatma Babayeva is AzerNews’ staff journalist, follow her on Twitter: @Fatma_Babayeva

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