A SECOND WIND

2007 saw great activity in almost all segments of Azerbaijan's financial market. The reason is the growing influx of oil revenues to the country and the increasing interest in the sector and in the development of its individual spheres not just within the population, but also international investors. This is proved by the 300 per cent growth in Azerbaijan's securities market. The volume of emissions considerably increased on the secondary market as well, which has not been the case in recent years.

Thus, 2008 will mark a new stage in the development of the country's financial sector in order to ensure access to the international market, especially as financial injections to the economy will be more significant this year, leading to a 200 per cent growth in Azerbaijan's strategic currency reserves. In this regard, the National Bank will take a number of measures to prevent a negative influence from the growing money supply on the economy. At the same time, experts and participants in the financial market expect many positive changes in all areas of this sector.

Currency reserves will increase

The National Bank has said in a statement that Azerbaijan's strategic currency reserves (the currency reserves of the National Bank, the assets of the State Oil Fund and the currency reserves of the state treasury) will reach 19 billion dollars in 2008.

Such rapid growth (according to the results of 2007, the volume of reserves slightly exceeded 7,000 dollars) is explained by the reduction of the account deficit of capital movement in 2008 due to the growing influx of foreign investments to the non-oil sector of the economy through the banking sector. Next year the surplus in the current account of the country's payment balance is expected to be 14 billion dollars.

The rapid growth in Azerbaijan's currency reserves in 2008 makes it necessary to increase the efficiency of their management. The strategy for managing currency reserves will be identified in compliance with the new investment policy. The main components of this strategy will be the diversification of reserves into various currencies and the reduction of dependence on one currency. This will make it possible to preserve the absolute value of the reserves, supporting the strengthening of the country's economic security.

Three managers - the World Bank treasury, the Swiss bank UBS and the American JP Morgan - are managing 270 million dollars today. Since the management of funds was not effective, the National Bank cancelled its contract with the Dutch bank ABN Amro and handed over the funds it was managing to UBS. The World Bank is managing 110 million dollars, UBS - 105 million dollars and JP Morgan - 55 million dollars.

The manat will grow even stronger

The National Bank also thinks that trends towards the strengthening of the national currency will be maintained in 2008, due to the country's growing attractiveness to foreign investments, as well as the macroeconomic framework adopted for the coming year. In these conditions, the NBA intends to preserve the regime of a regulated currency rate and carry out active operations to sterilize the currency.

It must be noted that since the beginning of 2007, the value of our national currency has strengthened by 3 per cent in Azerbaijan. It proved possible to prevent the manat from growing too strong as a result of active intervention by the NBA in the currency market. During the year, the National Bank sterilized more than 1.7 billion dollars. The NBA thinks that during the year, supply was higher than demand because oil revenues were actively used for the socioeconomic development of the country and the presence of foreign capital in the non-oil sector increased. In this regard, the NBA managed to cover the demand for currency by means of intervention.

Although the National Bank stabilized the value of the manat, the difference in the level of inflation caused the real value to strengthen by 3.1 per cent in 11 months. However, this did not affect the competitiveness of the non-oil sector, and the real value in this sector fell by 13 per cent from 2000. This confirms that the maintenance of foreign trade will be at acceptable levels in the medium-term.

Banks will improve immunity

Taking account of the risks of globalization, the main direction of the NBA's strategy in 2008 will be to secure financial stability. In this regard, it is planned to increase the immunity of banks against foreign and domestic shocks, to expand the use of the corporate management system, to hand over for management the risk zones which emerge in the process of introducing new technology and to improve the system of managing banks' risks.

In order to secure steadiness in the banking system, the capitalization of banks will also increase next year. Since the beginning of last year, the overall volume of bank capital has increased by 77 per cent and reached one billion manats. In 2007, Azerbaijan's banking system secured the highest rate of growth over the last four years as a result of active foreign borrowing and by bringing shareholders' capital into the country. During 2007, banks' assets increased by 72 per cent and liabilities by 59 per cent, including deposits by 48 per cent. This is a result of the increasing indicators of leading banks, because their rate of growth is approximately double the average for the whole system.

The growing resources of banks were channelled into financing the investment requirements of the non-oil sector of the economy, which created acceptable conditions for developing macro-economic balance along with stimulating growth in supply in the medium-term. Last year the rate of growth in credit investment amounted to 83 per cent, while long-term loans increased 2.5 times.

The insurance sector will become stronger

In connection with the adoption of the new law "On insurance activity", changes are expected in this sphere as well.

According to the head of the insurance surveillance department of the Ministry of Finance, Namiq Xalilov, at the same time as the adoption of the new law, significant changes were made to the "Insurance" chapter of the Civil Code, which will eliminate gaps in the legal regulation of agreements between insurers and their customers.

According to the new law, the Ministry of Finance will issue open-ended licences to insurance companies, which will increase the level of trust in them, because insurers will not fear that their insurance company might lose its licence before the expiry of the agreement.

After the law takes effect, the Ministry of Finance will endorse a new schedule for increasing the capitalization of insurance companies.

The new law will also have a positive effect on improving qualifications in the insurance market. As we know, according to the new law, people who want to work as managers in insurance companies and people who want to obtain a licence to work as insurance agents will have to pass qualification exams. These measures stimulate demand for education in the sphere of insurance activities.

The lifting of the ban on the involvement of foreign capital in local insurance companies will make the Azerbaijani insurance market even more attractive to foreign investors.

"The appearance on our market of new, strong players must play a positive role. The presence of sound competition always favours consumers, both in terms of cost and in the quality of goods and services," Xalilov said.