A STABLE COURSE

Once again the statement by the Central Bank of Azerbaijan (CBA) on the main trends in monetary and financial stability for 2013 sets its main goal as that of  keeping inflation at 5-6 per cent by introducing a more effective monetary policy from the point of view of the impact on inflation and the economic cycle in the long term. 

The country's average inflation rate for the year was actually 2.3 per cent. The population's incomes grew faster than the rate of inflation, as a result of which real incomes went up by more than 4 per cent. From the start of the year the average balanced inflation rate in countries which are our main foreign trade partners exceeded that in Azerbaijan by 2.8 per cent.

Central Bank governor Elman Rustamov, thinks that it is quite an acceptable outcome for the national economy to retain low inflation in circumstances where the country's non-oil sector has grown by more than 10 per cent and the investment and business climate is improving. 

Last year the consumption inflation rate was forecast to be 3.5 per cent. This forecast was however made before the prices of petrol, diesel fuel and natural gas went up for industry. This means that the prices of consumer goods might go up more than expected in the coming year.

It is understandable that the Central Bank will try to meet the inflation targets by setting interest rates on its operations, taking into account the impact of the Central Bank's decisions on the economy. The interest rates (the bank rate is 4.75 per cent today) with regard to CBA-related operations have a direct impact on the shaping of values on the money market (the most short-term segment of the financial market) which in turn has an effect on the medium- and long-term interest rates.

The Central Bank head is proposing to look at a much wider issue relating to interest rates on loans in Azerbaijan. The loan portfolio of Azerbaijan's banks is more than 14.5bn manats. More than one third of these are consumer loans at a rate of from 15 to 30 per cent. The remaining two thirds are loans to businesses, on which the interest rate has gone down by 5 per cent to 14 per cent annually. The Central Bank believes that these rates are high and hopes to cut rates on loans to businesses to single figures. Azerbaijan's banks are making profits of 15 per cent.

The Central Bank is planning to have a meeting with representatives of the country's banks in the very near future to discuss cutting interest rates. Moreover, the special structure has been set up by the Central Bank to protect the rights of bank customers. It monitors the banks' activity, requires of banks that they make data available to all customers on the actual annual interest rate, including the expenditure on servicing interest on debts, so that borrowers can obtain complete information about the loan that they have taken. 

E. Rustamov explains that, when the demand for loans outflanks the credit on offer, this also affects the cutting of interest rates. There is still great demand for cash in the country's economy. The making of payments in cash instead of saving or investing money is the main reason for the lack of credit resources. Thus,  making card payments more customary in Azerbaijan may help to resolve this problem. This is one of the aims that the Central Bank has set itself in the future.

The exchange rate and managing the reserves

Over the past 15 years the average annual changes in the manat-dollar exchange rate has been no more than 1 per cent. The stability of the manat has had a positive effect on the macro-economic and financial stability, boosting trust in the national currency and cutting down the extent of dollar use in the economy. 

In 2013 the Central Bank has been pursuing an exchange rate policy as part of an exchange rate regulating programme. On the currency market, owing to the profitable margin of the country's balance of payments (16 per cent of GDP) and the large amount of fiscal activity, supply has outstripped demand. In these circumstances the Central Bank has acquired the equivalent of 2bn dollars in foreign currency on the country's currency market in order to prevent a marked strengthening of the manat exchange rate and to neutralise the negative effect on the competitiveness of the non-oil sector in the current year.

As result of this, in January to September the manat-dollar exchange rate remained stable and only gained in value by 0.06 per cent in total. 

The deputy chairman of the Central Bank of Azerbaijan, Avtandil Babayev, thinks that the Central Bank will have to intervene if it is to maintain the stability of the manat in 2014 and, according to preliminary information, foreign currency worth 1.5bn dollars is to be immobilised on the market. 

Thanks to the Central Bank's interest rate policy, today the manat is the most stable and reliable currency in the region. The central banks in other countries have already expressed interest in using the manat as one of their reserve currencies, the chairman of the Central Bank's board noted.

In future the Azerbaijani Central Bankwill go over to a flexible regime, which will allow for more effective monitoring of the money mass and the interest rates.

Whereas the Central Bank's purchase of a large amount of money in dollars stabilises the national currency, on the other hand, it allows the currency reserves it has at its disposal to be increased. These reserves already amount to more than 13.7bn dollars, which is sufficient to finance the imports of goods and services for nine months. It is expected that this figure will reach 15bn dollars by the end of the year.

The Central Bank observes the principles of security, liquidity and profitability in managing its currency reserves, while continuing to adhere to a primarily conservative policy. The Bank plans to extend the list of managers abroad in order to ensure that the reserves are managed more competently. 

At the moment the Bank is managed by the treasury administration of the World Bank, the Swiss USB Bank and the American JP Morgan. They have 400m dollars at their disposal, and another 300m dollars is currently being handed over to the administration, while it is aimed to raise this amount to 1bn dollars.

Taking into account the positive dynamics being observed on the world markets, the Central Bank has decided to increase the investment segment of its reserves and plans to resort to more active instruments. One of these is the expansion of the institution of foreign administration, and another is geographical diversification. 

Expansion of its geography envisages the acquisition of securities on Asian markets, and in the initial stage the Central Bank is prepared to invest 500-600m dollars in purchasing them. The Central Bank thinks that in doing this such instruments as company shares, real estate or gold involve a certain amount of risk.

Babayev has said that the Central Bank is already having talks with new foreign managers to work on the Asian markets, mainly on the markets of Singapore, Malaysia, Indonesia and South Korea. The Azerbaijani Central Bank is also interested in the Chinese market. 

Against the backdrop of increasing currency reserves, the Central Bank is also boosting its total assets in Azerbaijan, which are formed of the State Oil Fund's finances and the government's assets abroad. Azerbaijan's strategic currency reserves amount to approximately 70 per cent of GDP, reaching 50bn dollars, which is sufficient to cover imports of goods and services for approximately three years.  

The strategic currency reserves' high growth rate is a factor making the country's economy less sensitive to external crisis factors and forming a strong macro-economic buffer. At the present time, the amount of the country's strategic currency reserves is approximately nine times greater than the amount of the state's foreign debt.

Financial stability

As far as the banking sector as a whole is concerned, 2013 is most likely to be remembered for two important events: the introduction by the Central Bank of a ban on the sale of bank products outside the territory of the branches and another year-long extension of the period in which the country's banks can attain full capitalisation.  

The Central Bank's former decision can be explained by the considerable growth in the credit market for natural persons over the last 18 months. The banks have started to work more actively with customers in this area, frequently relaxing the demands for checks on borrowers without reason.  In this connection, the average number of active loans taken out simultaneously by one and the same borrower has markedly increased. This approach may have extremely dangerous consequences.

It can be seen that the Central Bank is not providing banks with the opportunity to relax controls, while at the same time it is not planning to eliminate the operations of commercial banks from the market by applying administrative methods or make it difficult for them to operate there,. Therefore the Central Bank has postponed by another year the deadline for the banks to fulfil the new requirement that they should hold a minimum total capital of 50m manats, which was to come into force on 1st January 2014. At the same time, the Central Bank is obliging banks that cannot meet the new capital requirement to present their individual programmes for boosting capitalisation before 15 January 2014.

Ninety-five per cent of the banking sector has already met the demand regarding the required total capital or can at least manage to do that before the end of 2013. At present there are eight banks in the country that have a capital of more than 100m manats.

So, this year, as thought previously, no quantitative changes are expected on the market. The managing director of the Central Bank of Azerbaijan, Rasad Orucov, believes that the dynamic growth in the main banking indices, in particular in the deposits of the population, gives grounds for thinking that Azerbaijan's banking sector has withstood the test of the world recession and retained the trust that people have in it. Thus, even in a post-recession period the banking system has demonstrated a growth of 16-17 per cent on average. Similar indices for the credit portfolio and capitalisation are 20 and 30 per cent respectively. The population are increasing their savings by a quarter on average from year to year. He thinks that the qualitative indices are also exhibiting a good level.   

According to the Central Bank's forecast, by the end of 2013 growth in the banking sector will overtake growth in GDP fourfold.

The bank's assets have increased 24-fold in last 10 years. It is predicted that, when the results come out for the year, there will be a growth of 20-22 per cent in credit and deposit portfolios, which is four to five times more than the country's GDP growth rate in the current year. This trend is also expected in the non-bank credit organisations (NBCO). The credit portfolio of the approximately 145 non-bank credit organisations operating in this country has also grown by almost 25 per cent. It is interesting that the granting of loans in the provinces has gone up even more, by more than 30 per cent. 

In brief, Azerbaijan's banking sector, unlike that of many countries, is stable and in a zone of steady and sustainable growth and comfort.