SURVIVING THE LOCKDOWN

The ongoing socio-economic crisis forces the governments to loosen their grip in the fight against the COVID-19 pandemic to make some room to revive business activities. However, the process of awakening from an incredibly long and almost universal ‘hibernation’ seems not easy with the main problem being the lack of new financial investments.

Given that the resources of states are getting increasingly depleted due to the funding of social programs, the debt market becomes an issue of a special relevance for businesses in terms of cheap loans and securities.

Can Azerbaijani entrepreneurs rely on these tools to rebuild their businesses after lockdown?

Surviving the crisis

We have already seen that some major global brands, unable to withstand the pandemic, went bankrupt. Even successful big businesses had to opt for big debts in order to stay afloat, as the demand dropped practically everywhere in the retail sector. Many companies already know that by the end of this year they will excess their budgets, and it takes a lot of time and, naturally, money to restore the volume of business to the previous level.

So where can businesses get the required funds? Governments in almost all countries, including Azerbaijan, implement certain programs to support entrepreneurship during the lockdown. But the vast majority of these programs are aimed at ensuring that companies can pay their employees all or part of the wages. Plus, benefits are provided for fiscal issues such as payment of bank loans, etc.

All these factors hit the state treasury heavily, as the government needs to simultaneously subsidize the growing demand in the healthcare sector and pay the same salaries to employees of state-run institutions from the state budget, and so on.

Russia businessmen instead of state support suggest focusing efforts on developing the country's debt market. Thus, according to oligarch Oleg Deripaska, until 2008, when cheap foreign loans were widely available, business did not need state support. “No need for gifts or money distribution. Just give a chance to companies, banks, and even the population to borrow at lower rates,” Deripaska said. He also drew attention to the small selection of debt tools in the country in comparison with foreign markets: “We actually have only one instrument left - this is a loan. We have no bonds, we have no IPOs, all other instruments have disappeared,” Deripaska said.

In fact, this issue is somewhat similar to what is going on in Azerbaijan: despite many years of efforts, we failed to bring the debt market to the level of developed countries. Neither the securities market nor business loans could satisfy the needs of the real sector in financial resources even before the lockdown.

Last year, the issue of insufficient involvement of banks in the real sector of the national economy was raised in Azerbaijan at the highest level. As soon as the banks began to build new strategies for the development of their business loans’ portfolios, the COVID-19 pandemic broke out, hence setting other priorities for the banks, such as supporting clients survive the crisis and not sink themselves.

The loan problem

Admittedly, state authorities immediately got involved in the process to solve the arising problems. On June 4, 2020 the President of Azerbaijan approved the Rules for issuing concessional loans through the Entrepreneurship Development Fund and the relevant amendments. As part of innovations, state authorities began the introduction of mechanisms to provide state guarantees for new loans and subsidizing interest on these loans, state financing of the part of the loan interests of entrepreneurs, etc.. The electronic credit platform for entrepreneurs (e-edf.gov.az) created by the Ministry of Economy is already operational. The system allows the businessmen affected by the pandemic to borrow loans for up to ₼3 million with a grace period of 12 months. It is assumed that the provision of government guarantees on bank loans to entrepreneurs affected by the pandemic, and the subsidization of loan interest will prevent the occurence of problem loans.

Meanwhile, according to analysts of S&P Global Ratings, even in this case, it will be impossible to avoid an increase in the volume of problem loans of Azerbaijani banks in 2020 due to the consequences of COVID-19. “Financial system remains relatively weak and is still being corrected. This has a strong impact on the banking sector. We expect that in 2020 the expenses for reserves and the volume of problem loans of Azerbaijani banks increase. We forecast modest lending growth rates until at least the end of 2020, given the high level of uncertainty,” S&P Global Ratings stated in a recent report.

However, official statistics show that the share of overdue loans has been kept at 8% of the total loan portfolio, and even for 7 months of this year, there is only a 0.2% decline in this segment. It is noted that the state allocated ₼100 million to subsidize business loans, which helped to cover the loan portfolio of ₼1 billion.

Interestingly, following the results of 7 months of this year, the banks' loan portfolio is estimated at ₼14.2 billion, which means a 4.7 percent decline compared to the indicator at the end of 2019. And by about the same amount, 4.5%, the portfolio of business loans has been reduced this year - to ₼8.6 billion or 60.7% of the entire loan portfolio of banks. However, in July, that is, after subsidizing loans began, the portfolio of banks on business loans increased by ₼4.2 million.

Local bankers note that they understand the current situation with the businessmen and are ready to  make compromises. The main thing is that entrepreneurs do not avoid the calls of specialists from the credit department but come to the bank with a description of the problem and ways out of it. “We have a lot of clients who run a restaurant or tourism business. It is clear that they have suffered greatly due to the quarantine. This is an unexpected emergency that could not have been foreseen in any business plan. We are ready to take this into account and support our clients, grant them deferred loans, go for restructuring. But if in turn they are ready to fulfill their obligations as soon as they improve their situation,” one of the bankers said.

Recently the Association of Entrepreneurs of Azerbaijan held an online meeting to discuss ways to solve problem loans of representatives of the tourism industry. At the meeting, President of the Association of Banks of Azerbaijan Zakir Nuriyev said that a letter with proposals has already been forwarded to the Central Bank of Azerbaijan.

Banks are also mostly waiting for state support, since no matter how large and stable a bank is, it needs time to adapt its development strategy to new conditions. Given the quarantine restrictions, which create uncertainty about the future, banks do not want to take risks by allocating credit resources for business projects. Therefore, it is hardly worth waiting for a tangible decrease in lending rates - for this, the bank must be confident in its own business and the stability of assets. And is able to attract cheap loan resources.

Alternative option

Unfortunately, neither banks nor businesses in Azerbaijan have developed any other debt instruments than loans. The country's securities market is still, basically, nominal - although all the necessary infrastructure and legal framework have been created, in reality this has not become a part of economic relations in the country.

For example, bonds could successfully replace loans, if not only large, but also medium-sized enterprises would be interested in them. Bonds are even more convenient fiscal tool, when there is no need for an intermediary between the parties to the debt transaction, and one can get a loan on more favorable terms, etc. The main condition is the presence of a ‘clean accounting’ system, audits by  an external auditor and corporate governance. After completing the necessary formalities, the company is listed on the stock exchange and gains access to profitable debt resources.

The same applies to shares, by selling which a company can calmly survive crisis situations and get new investors. But again, over the past years, these instruments could not become useful tools of the financial system of Azerbaijan, while in developed economies they set the tone for the economic agenda. Moreover, the pandemic completely crippled the Central Bank’s market. According to the statistics, in January-August 2020, the total volume of transactions on all financial instruments in the Baku Stock Exchange (BSE) CJSC decreased by 28.6% compared to the same period last year.

At the same time, 65.2% of the BSE turnover constituted the share of government securities.

During the pandemic a program of benefits for the securities market was launched in Azerbaijan, which indicates the interest of the state in its development. In particular, the relevant action plan of the Central Bank of Azerbaijan indicates the provision of regulatory holidays to market participants.

It also provides for a postponement of measures in relation to investment companies that have violated capital requirements, an extension of the deadlines for the publication of annual financial statements, a postponement of inspections of the activities of investment companies and the stock exchange, etc.

In short, available ideas to activate the securities market in Azerbaijan gives rise to hope that, finally, the monopoly position of banks in the debt market ends soon, and companies that urgently need additional funds due to the pandemic-related problems are able to attract resources using these tools.