Our Analytics 23 march — 15:11

Elman Rustamov withstands first onslaught of coronavirus (Our analysis)



The new coronavirus is killing an already weakened global economy. Some of its spheres are already closing, unable to withstand the disaster that has fallen on their heads, while others are resisting, but it feels like this is not for long. It is especially difficult for countries whose economies are poorly diversified, including large oil producers. It is enough to see how the rates of national currencies of our neighbours - the Russian rouble, the Kazakhstan tenge, the Iranian rial - fall. A difficult fate befell exchange rates of neighbours who do not have oil - the Turkish lira and the Georgian lari.

Neighbours' currencies fell

Against the terrible background of the yet another global crisis, which terrifies world markets, the economy of Azerbaijan looks, perhaps, the most favourable. Thanks to the leading measures taken by the government, it was possible to prevent the panic that is characteristic of the economies of many countries today. True, it was not without alarm, especially in the early days, when messages from the developed countries of Europe and America drove everyone to markets and exchangers. But in the markets, products, including toilet paper that became deficient in the USA, did not end, and exchangers withstood the pressure. And the lines, the first signs of panic, disappeared.

However, even international rating agencies, not to mention our enemies and opposition experts, predicted a different situation. Thus, in a recent report, Moody's Investors Service agency noted that Azerbaijan may face the need to devalue the national currency if record low oil prices continue. Like, the deterioration of the economic situation will lead to a significant deterioration in the quality of bank assets. In addition, banks net interest margins will decrease as funding costs increase as a result of banks' efforts to prevent customer outflow. This may lead to a possible mass conversion of deposits in national currency into foreign currency and an increase in interest rates by the Central Bank to curb inflation due to the depreciation of national currencies.

World experts made a mistake - manat withstood the challenge

But thanks to the tight monetary policy of the Central Bank and the sale of foreign currency from the State Oil Fund, the stability of the Azerbaijani manat could not be shaken. However, according to Moody's, if oil prices remain at current record low levels for a long period, the Azerbaijani government will face the need to devalue the manat. But to doubt this statement, it is enough to recall the repeated statements by the Chairman of the Central Bank, Elman Rustamov about the readiness of the country's banking system to withstand any pressure, including external, for a rather long time.

Indeed, due to the high level of liquidity and capital, as well as a decrease in dollarisation, banks are less vulnerable today than during the 2014-2015 crisis. Large volumes of foreign exchange reserves also allow you to resist risks for a long time, including external ones. And all this thanks to toughening regulatory standards, improving the quality of risk management and lending standards that the Central Bank, already taught by the bitter experience of 2014-2015, has undertaken in advance.

Elman Rustamov is calm and prudent

In general, calm and confident statements of the chief banker, even in these difficult days, can be envied. So, after the US Federal Reserve reduced its rate to almost zero (to 0% - 0.25%), many central banks took a similar step to survive the new shock. And our Central Bank left its discount rate unchanged at 7.25%. According to Vusal Gasimli, executive director of the Centre for Analysis of Economic Reforms and Communications, our Central Bank is faced with tasks such as ensuring the manat rate and price stability, bypassing tightening monetary conditions. And this is a very important factor.

And not only to prevent panic in the foreign exchange market. The manat rate in the country's monetary policy is perceived as the main anchor of macroeconomic and financial stability. And it so happened that the factors affecting the rise of the manat rate by the end of last year are currently acting in the opposite direction. The country's chief banker has repeatedly argued that until the end of the year, the Central Bank applied a lot of efforts to prevent the manat from becoming more expensive. And recently, the demand for foreign currency has increased in the foreign exchange market, but manat should not be cheapened either. Yes, low oil prices - the main export component of the country - affect both the exchange rate and dollarisation, affect the balance of payments, affecting, ultimately, inflation. However, on the other hand, there are factors on the foreign exchange market that have a restraining effect on inflation.

Coronavirus is losing to manat

And today, the skilful management of manat in circulation is very important, which the Central Bank is doing successfully. In particular, it achieved the main thing: annual inflation remained below the target range of 2.9%, and the money supply decreased by 11% since the beginning of the year, which indicates the beginning of tightening monetary conditions. Even external shocks caused by the coronavirus pandemic and falling oil prices did not affect the annual inflation forecast. But the sharply increased volatility of financial markets in response to the coronavirus pandemic has led to the fact that even in the United States some banks have run into a shortage of funds, as customers began to withdraw large amounts from their accounts.

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