AWAKENING FROM LOCKDOWN

While the governments of many countries are planning to provide tens, or even hundreds of billions of dollars to economic recovery after the coronavirus pandemic, the Azerbaijani government is already quite optimistic about the prospects for this year.

According to the Minister of Economy of Azerbaijan Mikail Jabbarov, the expected 4.5-4.7% economic decline in May-June 2020 actually was in the range of 3.5-3.7%.

Central Bank of Azerbaijan is working hard to maintain the rates of national currency and inflation stable, at the same time sending positive signals to business through a reduction in the discount rate.

Accordingly, there are hopes that the normal business activity in the country recovers in the coming months, although it will certainly take much longer to reach the pre-pandemic level.

Positive signal

Meanwhile, as M. Jabbarov noted, “all these forecasts are directly related to the second wave of the pandemic, its progress and the compliance of our citizens with the relevant quarantine rules. Economy and economic activity are directly related to social activity, they should not be separated." Addressing entrepreneurs, Mr. Jabbarov urged them to take the measures against the spread of the pandemic seriously, since they are the main factors affecting not only health, but also business.

It turns out that the peak of economic slowdown in Azerbaijan already passed and the recovery phase began. Moreover, by the end of 2020, Azerbaijan will start the delivery of natural gas through the Southern Gas Corridor to Europe, meaning new revenues from the oil and gas sector will flow to Azerbaijan.

Foreign experts believe that the decline in Azerbaijan's GDP will not be so critical, even despite the extension of the special quarantine regime.

“We forecast that the decline in Azerbaijan's GDP in 2020 will be limited to 2.9-3.2% (depending on oil prices in the fourth quarter). In 2021, economic growth may recover to 3.8% with an average oil price of $55 per barrel and up to 1.5% at $45 per barrel,” analysts of the Russian Gazprombank note.

Meanwhile, the government of Azerbaijan is trying to intensify the process of awakening business from the lockdown hibernation. Thus, considering the forecasts on the low level of inflation (3-3.2%), in September CBA reduced the discount rate from 6.75% to 6.5%. "The Central Bank will continue to take all possible measures in accordance with its mandate to maintain macroeconomic and financial stability in the country and keep inflation within the announced target," CBA stated.

As before, this statement basically is a signal to business about the government's intentions to maintain stability of macroeconomic indicators and the rate of the manat.

Maintenance measures

Although the currencies of almost all countries neighboring Azerbaijan (ruble, lira, lari, rial) are suffering the consequences of falling oil prices and weakening exchange rate of the US dollar, coupled with the expectations of the second wave of the pandemic, manat endures all the hardships.

Recently, the government published the preliminary indicators of the state and consolidated budgets for 2021. Given the course to maintain macroeconomic stability, to continue economic reforms and to decrease dollarisation and other factors, the rate of the manat against the US dollar for 2021 remained similar to the forecast for this year (₼1.7 per $1).

However, as experts note, in order to fulfill this goal, Azerbaijan will have to spend part of its foreign exchange reserves. In fact, this process has already started. As reported earlier, in the eight months of 2020, SOFAZ sold foreign currencies worth $5 billion, which is 28.5% more than in the same period last year.

Moreover, the dynamics of the emission of US dollars to foreign exchange markets by SOFAZ differs every month. The record level was in March: almost ₼2 billion, which is 78.6% more than the same period last year.

The autumn marathon at foreign exchange auctions also began quite intensively, and already in the first week of September, the sales volume increased by 16.5% compared to the results of the foreign exchange auction a week earlier and reached its highest level since the end of March.

According to experts, the reason is both the resumption of the activities of trade and other companies after the lockdown, and the increasing need to ensure transfers from SOFAZ to the state budget.

In August, the 2020 state budget was amended to adjust the budget based on the new oil price of $35 per barrel, which previously was $55. And given the declining forecasts for budget income from the State Tax Service (by 8.7%) and the State Customs Committee (by 4.3%), the volume of expected transfers from the State Oil Fund increased by 7.5%. Moreover, these transfers account for 98.1% of the fund's expenditures.

“Increase in SOFAZ transfers to the budget should support the AZN/USD exchange rate, which has been experiencing less pressure in recent months. SOFAZ increased transfers to state budget from $6.7 billion to $7.2 billion, which should help maintain the stability of the exchange rate. Recovering oil prices after the March/April lows eased the pressure on the exchange rate of the national currency,” Fitch Ratings noted.

In 1H2020, the State Oil Fund has already transferred ₼5.7 billion to the state budget, or approximately $3.4 billion, which is almost 47% of the new plan for this year.

Although all these measures will ultimately lead to some decline in both the fund's resources and the foreign exchange reserves of Azerbaijan in general, there is objectively no other way out to maintain the economy and the exchange rate of manat.

New tools

On the other hand, it is important that the emissions to the real sector of economy eventually flow into the non-oil private sector, according to the government’s expectations for the long term.

Due to the pandemic, which hit the economy in general and business in particular, urgent measures need to be taken to make loans more affordable and profitable for entrepreneurs. After all, right now they are in dire need of additional funding to somehow prevent themselves from the crisis. Of course, all indicators of local banks for this year are still showing a decline, including in the loan portfolio. According to the Central Bank, as of August 31, 2020, the banks' loan portfolio is estimated at ₼14.3 billion, which is 4% less than a year earlier. And the portfolio of business loans was reduced by almost the same amount (4.3%) to ₼8.7 billion, or 60.4% of the entire loan portfolio of banks.

Interestingly, the Central Bank periodically holds meetings with businessmen. At the last meeting,  the development of alternative instruments that could replace business loans and loans in general due to their expensiveness and unavailability. For example, CBA began to implement the proposal of the Confederation of Entrepreneurs of Azerbaijan to introduce a mechanism of mutual settlements based on cheques. This is a popular method of payment for goods or services in the US and Europe: if a buyer does not have cash, he can write out a cheque, which indicates the amount and the end date of cash withdrawal. To do this, he just needs to have an account in one of the banks with guaranteed replenishment.

This mechanism can successfully replace consumer lending even in the West, although, unlike consumer loans, you can pay off later but not in installments, but without additional interest rate. Experts believe that in Azerbaijan, settlement checks will most likely be popular with legal entities for large purchases of goods or services. Interestingly, the CBA is studying the experience of Turkey in terms of the digitalization of settlement checks in order to start using electronic checks immediately.

At the same time, authorities also discuss the issue of attracting not only large but also medium-sized businesses to the securities market. The latter can become a good alternative to business loans. Whitewashing the accounting systems of most business entities, reducing the level of shadow economy help solve the main problem of enterprises in terms of issuing their own securities.

Thus, by breaking the monopoly of loans in the debt market and creating effective competition environment, CBA can indeed achieve some progress in reducing the cost of interest on bank loans.

We believe that the more businesses have access to financial resources, the faster the economic recovery process will go and the macroeconomic indicators will reach a stable level. And most importantly, not only because of the oil and gas sector.