Our Analytics 4 february — 14:03

Two more years of manat's stability (We're being convinced)

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BY MAMMAD EFENDIYEV

The first private credit bureau has been established in Azerbaijan. 'Azerbaijan Credit Bureau' has been established on the initiative of the International Bank of Azerbaijan, Bank Republic, Xalq Bank, Kapital Bank, PASHA Bank, Rabitabank, Unibank, OJSC Ziraat Bank Azerbaijan. The Association of Banks of Azerbaijan is already working on the formation of the material and technical base and the preparation of the organisation's strategy. The Office itself began the process of concluding contracts with credit institutions.

Why create a private credit bureau?

Talks about the creation of such a structure in the country have been going on for a long time, even when there was no sign of the crisis. It became increasingly difficult for banks to monitor the credit flows extended to customers in ever-increasing amounts. A single centre was required that could take responsibility for collecting, storing and analysing information from both credit organisations and a wider range of sources, including institutions providing leasing, insurance and utilities, cellular communication operators, as well as other databases related to debt obligations. This centre could also develop credit reporting, award individual ratings to borrowers, and provide other value-added services.

Banks were ready to pay considerable money to the source for such valuable information for them. But there came the crisis, followed by the devaluation of the national currency, which finally paralysed the country's banking system. And the most severe blow to banks was caused by loans: many business structures and ordinary investors in the new difficult conditions simply refused to repay them.

Banks sank, lending to the economy and the population lost its relevance: the bankers thought only of unreturned loans, the amount of which was estimated in billions. No one risked issuing new loans at affordable interest rates, and no one wanted to get into the 20-30-per cent debt. And then, of course, there was not a single credit centre.

To verify this, let us turn to the data of the Central Bank of Azerbaijan (CBA). CBA's statistics unequivocally testifies that the credit organisations of the country in comparison with 2016 reduced the volume of provided loans by 28.5%, down to 11.758 bn manats. The volume of overdue loans for the year increased by 10.5%.

The share of overdue loans in the loan portfolio of banks and non-bank credit organisations was 13.8%. And on such a seemingly negative background, the 'Azerbaijan Credit Bureau' is being created. And if you consider that such a centre was created on the initiative of the country's eight largest banks, then there is no room for doubts: Azerbaijani banks have already grown strong enough to return to the old idea and start active lending to the country's economy.

And you can see this is true by reading the report of one of the world's largest international rating agencies, Fitch Ratings. And, accidentally or not, but the announcement of the establishment of the bureau and the agency's report came in the media in one day.

Yes, Fitch clearly states that Azerbaijani banks will begin to restore lending volumes this year. Although at the very end of last year the same agency retained a negative outlook for the banking sector of Azerbaijan for 2018. In particular, this was mentioned in the Fitch report on the banking sector of the CIS and Georgia. Only one and a half month ago, the agency's experts noted that negative forecasts for Azerbaijan are related to pressure on the quality of assets.

Now it has changed its estimates in favour of Azerbaijan. Specifically, the agency notes that the country gradually reduces the dollarisation of loans and deposits, which also reflects an increase in confidence in the national currency. Special attention is paid by Fitch to the recovery of International Bank of Azerbaijan (IBA), which by and large became the initiator of the banking crisis in the country. The restructuring of the country's largest bank has almost ended, the next steps will be aimed at closing the currency position and privatising the bank. It is expected that after the completion of the recovery procedure, IBA shares owned by the government will be put up for privatisation.

We are developing the non-oil sector, but growing is the oil sector

However, agency forecasts are linked not only to the banks. According to the agency, social and political stability will remain in Azerbaijan. Fitch affirmed the long-term issuer default ratings in national and foreign currencies at BB+, revised the outlook from 'negative' to 'stable.' Last year, macroeconomic stability in the country increased, the balance of payments began to recover, and a surplus was formed on the account of current operations. As a result, international currency reserves grew, while the assets of the State Oil Fund (SOFAZ) reached last year 35.8 billion dollars. The agency expects that the assets of SOFAZ will continue to grow thanks to stable oil prices and restriction on transfers to the state budget. As for the consolidated state budget, its deficit of 1.5% of GDP in 2017 can be considered moderate.This year, the state budget will be in surplus.

Overall, in 2017 macroeconomic stability in Azerbaijan improved. As a result of the gradual rise in oil prices, as well as the tight monetary and fiscal policy of the Central Bank, the rate of the manat against the dollar has been steadily maintained at 1.70 manat since April. And this, in turn, led to a decrease in the rate of inflation, which in 2017 was at the level of 12.9%. But since April last year, inflation began to decline. And while maintaining stable oil prices, the agency predicts that the rate of the manat will not change in the next two years.

At the same time, Fitch predicts the growth of raw material dependence of Azerbaijan. The strong dependence of the economy on raw materials, which probably will not change in the near future, raises agency's concerns. In particular, the expected increase in gas exports after the commissioning of the Southern Gas Corridor project will further increase dependence on raw commodities. True, plans for economic diversification are on the agenda of the authorities, but initiatives put forward in the roadmaps of reforms are seen as distant, notes Fitch.

Deteriorating macroeconomic stability and weak economic growth may lead to a negative rating assessment, while good results of economic diversification and business environment can pave the way for a positive rating assessment.

Yes, Azerbaijan differs from countries that belong to the same category in the macroeconomic situation (rating BB). This is due to the fact that shocks of world oil prices cost the country more than other CIS countries that export raw materials. Thus, the real economic growth in the country over the past five years averaged 1.2%, which is almost three times less than the average for other countries with an ВВ rating (3.5%). In terms of GDP growth, inflation and exchange rate, Azerbaijan's estimates are lower than in other CIS countries exporting raw materials. And so, experts at Fitch believe, the prospects of strategic road maps developed for the purpose of diversifying the country's economy are remote.

Fitch's conclusions are true. True, Azerbaijan in recent years has achieved diversification of the economy to a rather large extent, today the non-oil sector has already exceeded 70% of the country's GDP, although it has not yet managed to achieve a breakthrough in exports. But starting from this year, in connection with the commissioning of the Southern Gas Corridor, the share of the oil sector will continue to grow both in the country's GDP and in its exports. This is how the implementation of the long-awaited project for the delivery of Azerbaijani gas to Turkey and then to Europe can affect the structure of the economy as a whole, and exports in particular. And in order for the project, into which we have invested billions of dollars, not to spoil the diversification picture again, the government will have to look for new ways for even greater development of the non-oil sector. The soil for this is prepared, and powerful enough.

Numerous industrial parks, agro parks, transport arteries and junctions, a free economic zone: this is an incomplete list of projects aimed at the development of the non-oil sector. The main thing now is not to slow down the pace of development of this sphere, which should outstrip the oil and gas industry at its own pace, where new large-scale projects are also being implemented. Otherwise, we will get stuck again on the oil needle.

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