ON THE CREST OF THE CRISIS WAVE

The more intensified the passions grow around the unstable economic situation in Europe, the more confident are expert forecasts that the next wave of the global economic crisis is in store for the world, and this time it will be even worse than before. However, the fact that the Old World cannot cope with its financial problems is already having a negative impact on many economies that have direct trade and economic relations with Europe. Although Azerbaijan has not been affected by the eurozone crisis, there is still a need for certain precautions insisted upon by the country's central bank.

European crisis wave "to sink" USA and Asia

Europe's debt crisis is far from being resolved despite the encouraging news from Greece and Italy. For example, the formation of an interim coalition government headed by the former vice-president of the European Central Bank (ECB), Lukas Papadimos, has ended in Greece. It should ensure the speedy implementation of structural reforms. The Italian parliament has approved a law on austerity measures, the so-called "law on financial stability" which envisages to raise the retirement age, the price of petrol and a number of measures to reduce government spending. This was followed by the resignation of Prime Minister Silvio Berlusconi who was succeeded by former European Commissioner Mario Monti.

Later, however, interest rates on mid-term Italian government bonds reached a record level of 6.29 per cent, thus reminding of the gravity of the European crisis. Furthermore, German Chancellor Angela Merkel described this period as the most severe for Europe since the Second World War.

More recently, the focus was on yet another relatively stable country, Hungary, whose sovereign credit rating of Baa3 was downgraded by the international agency Moody's to the non-investment category Ba1 with a "negative" outlook. The agency pointed to the growing uncertainty over achieving the objective of financial policy in the medium term. The "negative" outlook has been explained by a lack of clear mechanisms in Hungary to counteract the effects of the European debt crisis. Although the Hungarian Finance Ministry criticized this decision, it is obvious that the debts of European countries are turning into a growing burden. It is all about the banks which, while diversifying their portfolios, were buying the bonds of all European countries. And the downgraded rating of Hungary is yet another blow to the banking system. Speaking of banks, we cannot but mention the weak links.

On 23 November, European Commission President Jose Manuel Barroso and European Commissioner for Financial Affairs Olli Rehn presented the long-promised program on exit from the eurozone crisis. The Commission's proposals are practically based on two main points: strengthening integration in the sphere of fiscal policy and the issue of common EU public debt bonds, the so-called "stability bonds". The eurozone problems can be resolved by reducing budget deficits, resuming the process of lending to the real sector and reducing unemployment - these are the goals set by European leaders Barroso and Rehn. But all these goals can't be achieved without the radical governance reform in the eurozone - and this is the focus of the European Commission's proposals.

Barroso and Rehn have suggested introducing a procedure for permanent audit of fiscal policies of the eurozone countries. The procedure requires all members of the monetary union to submit draft budgets to the European Commission in autumn, not in spring after it has been approved. Having assessed a draft and seeing that a country pursues a risky fiscal policy, officials in Brussels may attribute it to the risk group. Such control is necessary not only to improve fiscal discipline, but also to issue the "stability bonds" guaranteed by all eurozone countries. It is this decision that global markets expect of Europe, as the bonds will help reduce the burden of debtors. So far the main opponent of the idea of introducing eurobonds is Germany which does not want to assume the risks of weaker eurozone countries.

Meanwhile, while Europe is looking for ways out of the problems, experts of the Federal Reserve Bank of San Francisco have said that the European debt crisis may sink the US economy. According to analysts, it is difficult to assess the extent the anticipated recession in the United States, but there are predictions that it would be particularly severe in the first half of 2012 and then start declining.

One way or another, the rehabilitation of the US economy is progressing very slowly. Experts believe that problems in Europe and the USA may also lead to a recession of Asian economies, because they are mostly export-oriented. According to IMF projections, there is a high chance of a global recession and the International Monetary Fund has lowered its forecast of economic growth this year and next.

Despite substantial discussion, programs, projects, etc., the world is aware of the inevitability of a new wave of crisis. But there is a definite advantage in this case - the crisis is predicted, which means that it is possible to prepare for it and reflect all the negative impulses in time.

Azerbaijan: crisis no obstacle to growth 

It must be said that the Azerbaijani economy was not particularly affected by the first wave of the crisis, but blows, especially those dealt to the banking sector, were palpable. But the banks have recovered surprisingly quickly, which points to the correct policies pursued in various components of financial and banking activities.

Globally, i.e. in macro-economic terms, experts and the government do not foresee any major risks to Azerbaijan in the medium term. Even if you look at the crisis period 2009-2011, the economy grew by an average of 5 per cent a year, which is quite high considering the global developments. This year, according to projection, the non-oil sector will grow by 9 per cent, foreign exchange reserves will reach $42 billion, the balance of payments surplus will be $14 billion (67 per cent of the GDP). With regard to another major "crisis" indicator, the external debt, it is only 8 per cent in Azerbaijan, while in Japan it is 200 per cent, in the United States 100 per cent and in some European countries up to 100-150 per cent of the GDP.

However, the absence of risks does not mean that "we should live in peace and that global challenges will not affect us", says the chairman of the Central Bank, Elman Rustamov. According to him, if Azerbaijan wants to maintain the stability of its economy in the long run, it must respond to these challenges immediately. "Of course, the recession and the reducing global demand may lead to lower oil prices on world markets, which is our most important issue. On the other hand, the situation on international financial markets, the volatility, the unstable rates, the borrowing problem can be viewed as risks for Azerbaijani economy, because we have significant foreign exchange reserves, and they are placed and managed on these markets," the head of the CBA says.

The low interest rates, he says, lead to a decrease in revenues from the management of these reserves. All this causes concern in financial institutions of the country. "We also receive money transfers from other countries. Although they are not very large, they are important for certain segments of the population, especially those living in districts. The recession and the shrinking economies of neighboring countries may reduce the volume of such transfers," Rustamov added.

With regard to the banking sector and the risks for it, we must first indicate that aggregate indicators for the banking sector in Azerbaijan grew by 20 per cent since the start of 2011, which leads to growth of macroeconomic indicators. In other words, we can state that activity in the banking sector has recovered and, as we are assured in the CBA, it will be maintained until the end of the year and credits will be issued at the level required for the economy. However, Rustamov acknowledged that the economy needs much more credits than now. "We need to think about additional financial resources and ways of attracting them. There are opportunities at home, but we also need to look for them abroad," Rustamov said.

According to him, the country's economy is facing the need for a serious capitalization program, and banks must play an important role in this. This requires that loans be given at low interest rates, which may be facilitated by the preservation of a low level of inflation, lower interest rates on population deposits and attraction of long-term cheap money.

In addition, to avoid the impact of crises in the coming years, Azerbaijan has to channel its macroeconomic policies into maintaining low exchange rates. For example, the main problem of the trade war between China and the USA is the low rate of the Chinese yuan. This factor has been the main imperative for growing exports in this country in the last 20 years. In Azerbaijan too, the appreciation of the exchange rate may hamper the growth of the export potential. According to Rustamov, although the manat has appreciated nominally by 1.4 per cent today, in reality it has not appreciated because there is higher inflation in the countries that are Azerbaijan's trade partners. In the future, we should not be complacent even with a neutral exchange rate, we need it to be mild and to contribute to increasing our export potential. Low inflation and a mild rate should give us the opportunity to keep the interest rates low, according to Rustamov.

These are the main risks. But in global terms, Azerbaijani economy looks quite stable and convincing.

Moreover, the head of the Central Bank believes that the country, having achieved a three-fold growth over the past eight years, can meet the objective set by President Ilham Aliyev of doubling the size of the economy in the next ten years. "This is a very ambitious goal, but at the same time it is realistic. Today, our GDP per capita is $6,000 in local prices. This indicator accounts for $9,000-10,000 in the purchasing power of the Manat. This means that in 10 years this figure should reach $12,000 and a further $20,000 on a parity price," Rustamov said. 

All this must take place by enhancing the non-oil sector. The opinion of experts overlaps with the approach of the government: it is estimated that to meet the objective the Azerbaijani economy should achieve double-digit annual growth for 10 years. The annual growth of the non-oil sector should be 10-12 per cent. To achieve these figures, the head of the CBA believes, there must be high investment activity in Azerbaijan and a component of foreign investment in that. And to attract large-scale foreign investment, we need a highly qualified workforce.

So it is obvious that the components of economic stability and sustained growth are not only closely interrelated, but also strongly depend on the development of other spheres of life. For example, while elaborating Rustamov's last thesis we can say that the training of qualified professionals is impossible without a high level of education, a modern health care system, etc. In this context, we should point to the attention the government is paying to the development of the education and health infrastructure. Only such well-coordinated work of all government agencies and all components of public life can contribute to the final result.