NOTHING BUT THE TRUTH

Azerbaijan's banking sector is the first sphere of the country's economy to feel for itself the negative effect of events on the world financial stage. Neither the banks nor the government are denying this.

Sudden restrictions on lending, the change in loan terms, figures showing a fall in bank deposits, persistent rumours about difficulties and even bankruptcy for banks that are considered amongst the top 20 or even 10 in the country - all this showed that negative symptoms are present in the system itself.

It is no secret that this kind of talk, even hypothetical, is extremely dangerous for such a sensitive area of business as banking, the success of which is founded 50 per cent or more on customer confidence. Statements by the banks themselves that they are continuing to flourish were not convincing against a backdrop of refusals to issue credit and press speculation on the lack of reliable information. 

All this prompted the National Bank finally to make detailed commentaries and open statements, backed up by statistics, on the issues of public concern.

No credit ban

First, it was acknowledged that the Azerbaijani banks really had limited lending in order to maintain liquidity during the crisis period. 

Some counterparties of local banks that had provided them with credit lines recalled their debts ahead of time because of the world financial crisis. "The collection of these liquid funds was bound to influence banks' lending, but it is still not a matter of banks stopping lending altogether," the deputy chairman of the National Bank's board, Avtandil Babayev, said.

In the first 10 months of the year Azerbaijani banks' credit portfolio grew by two billion manats (43 per cent) and reached 6.3 billion, but in October the growth rate was 1.2 per cent. "The financial crisis is known to have reached a low point in October and it's important that even then lending was not stopped in Azerbaijan," Avtandil Babayev said. Figures for 1 to 23 November show that new credits worth 389 million overall were issued to 38,000 individuals and loans of 280 million manats were repaid. This included consumer credits of 82 million manats and the rest was business lending.

The National Bank is not denying though that the banks are turning down customer requests for loans. This is because of a cautious policy in this area: loans are issued only to reliable and regular clients in order to avoid unnecessary risks. But it is not good ethics to say this directly to a regular customer - he may simply not go back to a bank that considers him "unreliable". So bank staff like to use phrases such as "the National Bank has forbidden us from issuing loans". There has not actually been any such ban.

"Every bank is free to conduct its own credit policy. The NBA simply makes recommendations on the appropriate management of risk," the head of the NBA's department to oversee loan organizations, Rasad Orucev, said.

But lending remains the most popular banking instrument in Azerbaijan today. The banks' lending portfolio is 65 per cent of its assets today. Up to 30 per cent of the credit portfolio is made up of consumer credits, although in some banks the proportion is up to 50 to 60 per cent. "This can be considered quite a normal figure for the current situation. The banks are trying to place funds in profitable vehicles and this is what loans are today. This is the average figure - there are banks where it is higher or lower," Rasad Orucev said.

As for banks' own debts, thanks to the fact that at the first signs of the world crisis the NBA took action to ensure banks kept their external debt at a safe level, debts today, which are 2.2 billion manats overall, make up just 25 per cent of banks' obligations, while in Kazakhstan, for example, they are 78 per cent. In the first 10 months of this year Azerbaijani banks repaid foreign debts of 900 million manats, of which 210 million were paid in September-October.

Yes, there were banks that risked not paying their debts. There were requests for help to the National Bank. "We did not refuse anyone. But in the end, some banks withdrew their requests for help, saying that they had coped with the problem themselves. Only one bank, Unibank, took a loan from the NBA of 50 million manats at an annual interest rate of 7 per cent with the option of extending the term," Avtandil Babayev said.

This bank ran into problems because of external creditors withdrawing their funds, as was mentioned above. "In any case, taking into account the interests of the whole banking sector, we are ready to support banks where necessary. The head of state has also provided political support to the banking sector," Avtandil Babayev said.

Only major deposits

And now for deposits, or to be more exact, why they fell by 2 per cent in October. Some media accompanied these figures with the headline "Public withdraw their bank deposits". It sounds very gloomy. This did in fact happen and was largely linked to the loans situation outlined earlier.

Avtandil Babayev said that it was mainly large deposits that were withdrawn. "We are closely analysing the situation," he said. "One of the reasons for the fall in deposits is the restriction on bank lending in the country. Businessmen who before could take loans from banks to meet their business needs now have lost that opportunity to a certain extent, so they are forced to withdraw their deposits and use them to develop business." Azerbaijan's main foreign trade partners are today moving to full payment in advance which is also having an influence and, consequently, creates a need for additional funds.

Placing deposits in banks' share capital is another reason. This trend is wholly logical as a law was recently adopted "On exempting banks and insurance organizations from profit tax for the next three years" as part of the budget package. "Major investors had additional stimulus to place their funds in banks' share capital. They used to keep their money in deposits, as dividends on deposits were exempt from profit tax," Rasad Orucev said.

Of course, no-one is denying the negative influence of the situation on the world financial markets on depositor activity. There is a panic factor and decisions are taken to withdraw deposits without analysing the real situation. "It happened that a customer would return to the bank a week after withdrawing his deposit - he had thought it over again and decided to return his deposit," Avtandil Babayev said.

The fact that over the first 10 months of the year the population's deposits in banks rose by 326 million manats (22 per cent) to reach 1.8 billion manats makes the conclusions of the representatives of the country's main bank look convincing.

Nevertheless, the NBA is ready to take further action to maintain depositor confidence and is considering the possibility of proposing to parliament changes in the system of insuring deposits in Azerbaijan's banks, in particular to accelerate the increase in the size of deposits guaranteed by the Azerbaijani Deposit Insurance Fund (ADIF). At present deposits of 6,000 manats are guaranteed but from 2010 it should be 8,000 manats (including interest). "But if necessary we can suggest speeding up the process to raise the limit," Avtandil Babayev said. He also said that the NBA intends, should the need arise, to change the provision that the fund insures only deposits, whose interest rates do not exceed by a factor of more than 1.8 the National Bank's refinancing rate. The NBA's refinancing rate is 10 per cent at present, which means that deposits with interest rates no higher than 18 per cent are insured.

Here is another substantial argument in favour of the security of the situation in the banking sector. At present 23 per cent of bank assets in the country, which are 1.9 billion manats, are made up of liquid funds, that is, there is quite enough in the country's banking system to repay all deposits.

Moreover, thanks to the action taken by the National Bank of Azerbaijan, additional liquidity of 220 million manats in the banking system is ensured. The director of the NBA's monetary policy department, Xaqani Abdullayev, said that obligatory cash reserves for banks' internal liabilities fell from 12 to 9 per cent. "After this decision had been taken we observed that every percentage fall meant an additional injection of liquidity into the system of 40 million manats, that is, 3 per cent produced 120 million manats," Abdullayev said. At the same time, the liquidation of 5-per-cent obligatory reserves on external liabilities yielded a further 100 million manats of liquidity. And this took place in conditions of stabilization of the money supply this year compared with last. At present the growth in the money base in the country is at a satisfactory level, from the point of view of macroeconomic goals, and hovers between 25 and 29 per cent.

Another result of the reduction in the refinancing rate was the stabilization of banks' lending rates. From the start of the year up to September a growth of 1 per cent was observed in the average lending rates and rates then stabilized at 18.2 per cent. Given the real benefit of the decision, the NBA intends to continue the reduction in the refinancing rate in December too in line with trends on the international and domestic financial markets.

Stability and liquidity

And finally to macroeconomic stability in Azerbaijan as a whole - Azerbaijan's balance of payments is the main factor in the country standing firm in the face of the world financial crises. From this point of view, the situation in Azerbaijan is favourable - in the first nine months of the year the country's balance of payments surplus was 15 billion dollars.

Azerbaijan has strategic currency reserves of over 18 billion dollars, which is twice the state's foreign obligations. The country's creditor position is 11 billion dollars, that is, even if debts are recalled ahead of time, Azerbaijan will be able to pay them. "Ideally the country's currency reserves should be sufficient to finance import potential for 28 months," Avtandil Babayev said.

As for the National Bank's currency reserves, they now stand at around 5.27 billion dollars. "Volatility can be seen in the reserves as we went over to a new system of managing the reserves from the end of 2008 and also made changes to the currency reserve structure. Now, they are 60 per cent US dollars, 30 per cent euros and 10 per cent pounds sterling. This allowed us to avoid losses from changes in the currency rate differential," Avtandil Babayev said. Meanwhile, the security of the currency reserves is completely ensured and income from their management now stands at 152 million dollars since the start of the year.

The action taken by the National Bank has also helped to reduce the level of import inflation in Azerbaijan. The two currency basket introduced by the NBA in March this year, made up of 30 per cent euros and 70 per cent dollars, is playing a positive role in preventing import inflation, as the NBA's goal is to reinforce the manat exchange rate at a minimum at the level of inflation in these countries. "They are forecasting inflation rates of 12-14 per cent there at the end of the year, so the rates of reinforcing the nominal effective exchange rate here are approximately the same, that is, import inflation in the country has practically been neutralized," Xaqani Abdullayev said.

As for the real, effective manat rate, it has strengthened by 21 per cent since the start of the year, but compared with last year there are significant changes in the composition of the real, effective rate. Some 90 per cent of the rate used to be created on the basis of the difference between external and internal inflation, thanks to the strengthening of the nominal effective rate this difference has been significantly cut. Now the nominal effective exchange rate has more than a 60 per cent share in strengthening the real effective exchange rate. "In this way we are creating a disinflation effect on the domestic market. Next year we will set new parameters taking account of the situation in neighbouring countries," Xaqani Abdullayev said.

Therefore, despite the fact that the growth in people's incomes should have brought about an increase in prices for goods and services, the fall in the cost of goods imported into Azerbaijan against the backdrop of the world economic crisis and also the continuing anti-inflationary measures taken by the government and NBA have reduced the rate of inflation in the country over the last few months. Inflation in Azerbaijan in 2008 may be 18-19 per cent. Avtandil Babayev said that this factor also allowed the NBA to concentrate its efforts on maintaining stability in the country's banking sector, in other words, anti-inflationary measures have already become less pressing.

In this way, Azerbaijan can be said to be successfully emerging from the trials of the world crisis, while the NBA is quite successfully managing its function of supporting stability in the financial sector and in the economy as a whole and ensuring its money supply. But the crisis is not yet over so it is still too early to draw a line under this. However, the chairman of the NBA board, Elman Rustamov, has already announced that the National Bank intends to continue to ease monetary and credit policy in 2009. "Work will be done in this regard by the fiscal sector within the budget framework. But we have resources outside the budget and the National Bank, and we are using all our options to support optimal liquidity," he said.