Our Analytics 24 july — 12:06

Threat of financial crisis for Azerbaijan (Our analysis)

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BY DMITRY DOKUCHAYEV

I understand the first reaction of the Azerbaijani reader reading this line: our economy, too? Alas, like the Russian one. Where to get away from this... Even worse, the financial explosion cannot be excluded. This follows from the report of the influential Institute of International Finance (IIF), which unites more than half a thousand participants in the financial market from different countries. It has estimated the size of the total debt in the world, including almost everything in this parametre: debts of governments, banks, corporations and households. The result was stunning: 217 trillion US dollars. This is a new world record for debt. But first things first.

What does it threaten everyone with?

Compared to the last year, the indicator grew by $600 billion: mainly due to the rapid borrowing of developing countries.

This is hard to believe, but the figure is 327% of global GDP for the first quarter of 2017. This means that the entire world economy should work without a break for three years and three months only to cover the accumulated debt burden. But since such a scenario is impossible, and the debt will undoubtedly continue to grow, it remains to note a sad fact: the world financial system is a global pyramid, which is constantly threatened with a large-scale collapse.

And when we worry because of periodic economic crises, it seems, in fact, we should rejoice that they do not happen all the time. After all, the world economy literally stands on a powder keg of colossal debt, capable of exploding at any moment. The authors of the study from the IIF warn that an increase in debt is a serious risk factor that can create obstacles to long-term growth and, as a result, risks to the financial stability of individual countries.

At the same time, the two largest economies of the world, the US and China, demonstrated the sharpest increase in the debt for the year: in both countries, the growth was $2 trillion (this, by the way, is higher than Russia's entire annual GDP). As a result, the debt burden of China reached $32.7 trillion, and that of the US exceeded $63 trillion. Now the ratio of national debt to GDP in the United States is 106.7%, and the debt itself exceeds $19.9 trillion.

In China, a sharp increase in debt has already begun to negatively affect sovereign solvency. At the end of May, the very same Moody's for the first time since 1989 lowered China's sovereign credit rating, explaining its decision by the slow pace of reforms, as well as the country's large debts. According to the IIF estimate for May 2017, China's aggregate debt surpassed 304% of GDP. Many of those countries that seem to be in no danger are also in not so good a position.

Judge for yourself: Brazil's debt increased by $600 billion to $3.6 trillion, India's by $200 billion, to $2.9 trillion. The debt-to-GDP ratio has grown faster than anywhere else, apart from China, in Chile, Colombia and... Turkey. Yes, dear reader, our beloved and so successful in all Turkey...

Alas, this is the crisis...

How to treat the staggering data of total world debt? According to Carsten Brzeski, senior economist at ING Bank, a high level of debt indicates that the crisis has not yet ended either in the US, in the Eurozone, or in Asia.

The international rating agency Fitch warns that the growing debt burden represents a serious threat to world financial stability. According to James McCormack, head of the department of sovereign and supranational ratings of Fitch, due to high indebtedness, countries (both developed and developing) 'are subject to a change in the global interest rate system.'

'The importance is not the size of the debt, but interest rates,' says Charles Robertson, chief economist at Renaissance Capital. 'Even the lowest level of debt can become prohibitive for a borrower if interest rates are too high.' When global interest rates are low, a high level of debt can be considered acceptable. The key risk, if we take into account current levels of debt, is a recession (and as a consequence, inability to repay a debt) or an increase in interest rates as a result of the recession, the expert adds.

Moscow and Baku in the risk zone

Meanwhile, the researchers attributed Russia to the number of countries, in which the debt burden fell. Of the four components of debt that the IIF measures, Russia has only experienced the rise in its public debt in the last four quarters, from 15.9% to 16.3%. And yet in general, Russia has a very favourable debt situation. The country has the lowest ratio in terms of the ratio of public debt to GDP (less than 17%) among all G20 countries. Moscow must thank for this the financial policy pursued in the 'fat' 2000s (when oil was growing in price, and the time of crises has not yet come) by Alexey Kudrin, the long-time associate of President Putin, who headed the Ministry of Finance. He insisted that the government should actively pay superfluities from oil exports primarily to pay off foreign debts, which was done. As a result of this approach, the Russian economy, of course, now has many problems, but the problem of external debt is not listed among them and, as a result, it does not face a default on international obligations.

The situation with Azerbaijan's debt is also not critical. According to Azerbaijani sources, as of April 1, 2017, the state debt of the country reached 19 billion manats. Most of them (11.9 billion manat or $7 billion) constitute the external public debt. Its share is estimated at 18% of GDP, and the total amount of public debt is in the range of 25% to 30% of GDP. By world standards, this is a very modest indicator.

And this is a serious chance for development for both Moscow and Baku. It is no secret that our countries in the previous two years faced serious economic difficulties, mainly because of the dramatic fall in the price of oil in late 2014. Now the economies of Russia and Azerbaijan are slowly getting out of the crisis, but serious investments are needed for a decisive breakthrough. It is difficult to find them inside the country: the oil has not grown in price, there is not enough money, budgets are being filled with a deficit. One of the possible solutions is the attraction of borrowed funds in foreign markets. Both for Moscow and for Baku, this is a very promising path, given their relatively low debt burden: money for future growth can be safely borrowed.

For Russia, however, this procedure is difficult due to international sanctions imposed after the annexation of Crimea. But this is a completely different story; it has nothing to do with debts... It is important that Russia and Azerbaijan retain good chances for development...

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