MOVING TOWARDS STABILISATION

Having handed over most of its functions to the Financial Markets Supervision Authority, the Central Bank of Azerbaijan [CBA] has retained its right to predict the fate of the national currency and control the volumes of money available. Following last December's manat devaluation, however, the public sensitivity regarding this subject has increased somewhat, so that each new statement relating to it has to be exceptionally cautiously worded. Moreover the currency fluctuations and the stir they cause strike an exceedingly damaging blow at the country's financial sector. There is still no end in sight to the hard times being experienced by many local banks and insurance companies...

Thus, in spite of the rumours which are persistently being whipped up in society regarding an alleged third wave of Azerbaijani manat devaluation in summer this year, the country's Central Bank analysts are of a quite different view. CBA governor Elman Rustamov recently told journalists that the manat had stabilised of late and that this tendency was set to continue to the end of the year at least.

"The manat exchange rate is determined by demand on the market. Recently the Central Bank has stocked up with approximately 85m dollars in order to stabilise the exchange rate," the country's chief banker reported, after mentioning that rather sacred of thoughts that the manat is moreover still seeking to attain stability against the backdrop of a floating exchange rate regime. Here it is a question of current changes in the exchange rate which are barely noticeable in the global economy or to citizens. As far as the forecasts are concerned, they," E. Rustamov cautiously noted, "depend on internal and external factors, on oil prices." But, he continued, the situation obtaining today suggests that no serious changes in the manat exchange rate are to be anticipated before the end the year. "Oil prices and the general economic situation in the country allow us to say this," the CBA head said.

We can add that the forecasts for oil prices are in actual fact not indicating that anything dramatic will happen, and international analytical services are assuring us that they will remain at roughly 40 dollars per barrel. Owing to the growing incomes of the State Oil Fund [ARDNF], this fact is having a positive effect both on the process of gradual restoration of the country's foreign currency reserves which had been withering away by the beginning of this year, since the base oil price had been set at around 25 dollars per barrel in the state and combined budget for 2016. "Our foreign currency reserves have grown since the beginning of the year and today amount to 4.2bn dollars, up on the figure at the start of the year. Foreign currency incomes have been obtained due to both competent administration and to the market as well," E. Rustamov said.

Here we would like to add that the executive director of the State Oil Fund, Sahmar Movsumov, also asserted recently that in the first quarter of this year the Fund's overall capital had grown by two per cent. "In spite of the fact that there was initially a budget deficit, owing to the rise in prices observed on the oil market of late, the Fund's capital is not expected to decrease, nor is a further budget deficit anticipated," S. Movsumov said.

Thus, the economy is gradually moving towards stabilisation, and, according to E. Rustamov, a very good and coordinated monetary-credit and macro-economic policy is currently being pursued in Azerbaijan. "This policy is well-coordinated with the relevant bodies, first and foremost with the Ministry of Finance," he said. The Central Bank has, according to him, been released from almost all commitments regarding the supervision of the banking sector and has been completely devoting itself to forecasting the volumes of the money, so that it can have an effective impact on inflation and the manat exchange rate. 

We would like to remind you that the Centralized Credit Registry Service [CCR], which formerly acted under the jurisdiction of the CBA, was transferred to the Financial Markets Supervision Authority a few days ago. Thus, the Authority has practically taken complete control of the situation on the country's banking market, which has been through somewhat hard times over the last few years.

We note that in just a short interval of time the new structure has already managed to take a number of "fine-sounding" decisions which have evoked ambiguous reactions from the participants in the market. Thus, the month-long moratorium introduced on 4 April in relation to the issuing of consumer finance in foreign currency to persons that do no have foreign currency incomes and bank accounts has remained in force and has been included in the new rules and prudential frameworks governing manat and foreign currency consumer finance.

The only proviso was that the restructuring of foreign currency loans should be upgraded. Besides this, foreign currency mortgages have been banned in Azerbaijan. According to CBA data, we note that in the first quarter of 2016 the banks' loan portfolio amounted to 19.69bn manats, of which 50.9 per cent had been issued in manats.

At the same time, in order to ensure the stability of the banking system, a decision has been taken to apply more rigorous prudential frameworks to banks regarding the management of their loan risks.

It needs to be said that it was precisely the problem loans that have mainly become a "headache" for the local banks following devaluation.The results for the first quarter of 2016 indicate, according to CBA data, that the volume of impaired loans and the interest owed on the banks' loan portfolio amounted to 1.33bn manats, which is almost 10 per cent more that the figure for the similar period last year. They accounted for a 6.75-per-cent share in the banks' loan portfolio, which is 0.88 per cent higher than that for January-March 2015. Some banks are quite obviously coming under pressure and this is seriously affecting the overall situation on the market and, what is even worse, is undermining customer confidence.

According to Chairman of the Board of Directors of the Financial Markets Supervision Authority, Rufat Aslanli, the Authority has drawn up a separate programme regarding the regulation of impaired loans. "If the banks are faced with the problem of paying out on short-term loans, then we will take this into account, and the state is planning to render these banks assistance in meeting their liabilities, R. Aslanli said.

Both the regulator and the banks themselves are takjing measures to keep the situation on the loan market stable, he says. "Following the manat devaluation, the banks made concesssions to customers with regard to interest rates and extended the loan repayment terms. It cannot be ruled out that with the formation of additional resources the banks will be able to offer customers extra benefits," Aslanli said.

In his opinion, the issue of dollar loans should be decided on the basis of a mutual agreement between the banks and their customers. "It is not so easy to discern those who do not wish to repay debts and those who do not have the ability to do it. In granting these borrowers concessions, we are encouraging them, but "punishing" those responsible borrowers who pay back foreign currency loans, while they are repaying the money at the new exchange rate," the head of the Financial Markets Supervision Authority said.

But to come back to the state's intention to assist banks that are in trouble, we note that the latter precedent is set in connection with Bank Standard, which was issued with 15m manats a few days ago owing to the deteriorating value of its assets, since its liquidity and the state of its capital have come under considerably greater pressure of late. We add that since 3 March the Financial Markets Supervision Authority has appointed a temporary administrator to the bank for a period of three months.

"In all its parameters the bank is a significant element in the system and holds the third largest number of the population's accounts. The government will therefore take all the necessary measures to restore the bank's financial stability. Taking into account its important position in the system, the bank will recover and fulfil all its obligations to its customers," Aslanli said.

We note that measures like these are common in world practice, when the state subsidises the leading players on the market in order to help the general situation to recover. Although, according to Aslanli, at the present time no major problems affecting the remaining 36 banks are noticeable, nor are any cardinal measures scheduled to be taken in relation to them.

At the same time, according to the news that has been leaked to the press, Azerbaijan's banks are applying for a three-year tax holiday, starting in 2016, on the part of the profits that is to be channelled into capitalisation, which means that additional subsidies from the state are likely to be required throughout the system. According to a source on the banking market, the country's Banks Association has made a similar application to Azerbaijan's Financial Markets Supervision Authority.

We note that on the whole by the end of February 2016 the banks' total capital amounted to 3.6bn manats, down 15 per cent from the start of the year and down 17 per cent on the figure at the beginning of February 2015. Impaired loans are the main reason for this. The fact is that, in keeping with the law, the banks are obliged to set aside reserves from their own capital to cover impaired loans. Therefore, after the volume of impaired loans increased, the banks overall capital began to decline and, as a result, some banks have been forced to stop meeting the country's Central Bank requirement that they should hold a minimum total capital of 50m manats.

It should be mentioned that similar measures have already been taken earlier in Azerbaijan during the severe phase of the world financial and economic crisis in 2008. Tax breaks were being employed up until the end of 2011, but the government regarded it as inexpedient to continue them, owing to the fact that the Azerbaijani banks' assets were growing at sufficiently rapid rates and the banks were often faced with the problem of where to invest them.

Nevertheless, certain bank concessions have been retained: in December 2011 the Constitutional Court revoked the decision on charging a 10-per-cent tax on the dividends received by bank and insurance company share-holders. In the opinion of the court, the pure profit obtained by juridical persons which is channelled into recapitalisation, does not correspond to the concept of a "dividend".

We add that Tax Minister Fazil Mammadov recently confirmed that the banks have applied for another tax holiday and reported that the country's government was looking into it. 

The situation in the remaining sectors of the financial market such as insurance, leasing and so forth, is also a tense one, so it is most likely that additional decisions will be taken on that in the very near future as well.

In short, the process of restoring the country's financial and banking sector forces, which have been undermined by devaluation, is in full swing. The main thing is that the state is actively involved in this process precisely with the intention of retaining the trust of the population and customers with regard to the market, for this is ultimately reflected in the injections of foreign currency into the country from abroad and making the country more attractive to foreign investors.