HOT SUMMER IN CURRENCY MARKET

The first half of 2016 was marked with a continued shake of the global economy that negatively affected many market segments. The crisis trends were also observed in several sectors of Azerbaijan’s economy resulting in some drop of the national GDP. Despite some profound economic reforms that allowed smoothing these negative effects considerably, it is too early to expect a full-fledged response in such a short period.

However, the situation in the financial and banking sector is not so optimistic and seriously undermines the whole economy.

To be or not to be? In tune with the protagonist of Shakespeare’s famous tragedy, this difficult question occupies the minds of the majority of the national population in these hot summer days when it comes to yet another devaluation of manat. In fact, the rumours have significantly increased thanks to the appreciation of the dollar against the manat during the last month: $1/1.5114 manat on June 13 against $1/1.5549 on July 13, according to the Central Bank’s published exchange rate. Although the commercial banks sell dollars at 1.6 manat per dollar, given the allowed margin of 4%.

According to some experts, the major highlight of the last few weeks, affecting the manat’s exchange rate, was Brexit (a referendum to gauge support for Britain’s continued membership in the EU) and the subsequent decline in the value of the British pound against the dollar. Almost on the same day following the referendum, the Azerbaijani banks harshly restricted or even stopped selling dollars. The Supervisory Chamber on Financial Markets had nothing to do but intervene and warn the banks of the responsibility for accelerating tensions in the foreign exchange market.

Meanwhile, the Central Bank of Azerbaijan (CBA) has stated that “the exchange rate of the dollar against the manat is determined on the basis of the demand-supply ratio of the local foreign exchange market and by no means is related to the fluctuations in global finance markets due to Britain’s decision to leave the EU”. The main factors affecting the supply and demand in the foreign exchange market are the balance of payments (the volume of imported and exported foreign currency), the volume of oil transfers for budgetary needs, as well as the implemented measures to reduce dollarization within the country.

According to CBA report, thanks to the strategy of diversification, the currency reserves are formed of a variety of currencies, including the US dollars, euro and pound sterling, as well as some liquid financial instruments. “Since most of our reserves (over 85%) are in the US dollars, the depreciation of other currencies against the US dollar has not led to significant foreign exchange loss”, says CBA.

Shahmar Movsumov, CEO of the State Oil Fund of Azerbaijan (SOFAZ), another player in the currency market, is also sceptic about the third devaluation in Azerbaijan in the nearest future, calling any such rumours “no more than a hype”: “Today a lot of people exchange manats for dollars at high rates. Then, when they really need manats, they will have to do the same in reverse order but at lower rates. What for? Just because someone spreads rumours about the devaluation?” SOFAZ’s Chief added that all talks about exchange rate fluctuations play into the hands of speculators only. “The prudence is not to use a single currency. Such operations are always risky, making it really hard to earn on speculations. Only highly skilled traders can do this but they often suffer from significant losses. So, it’s better to spend your money in the currency you earn“, advised Movsumov.

CBA has joined SOFAZ to reduce tensions in the foreign exchange market, which resulted in a significant increase of the volume of supply. Since July 12, both entities have sold $100 million each to 29 banks through an auction, which is almost 4 times more than in previous times.

Economist Vugar Bayramov believes that this is the first necessary step to stabilize the exchange rate, since the increased volume of dollar supply will help reduce demand, which is not always justified. “Quite often, a commercial bank requests $30 million to cover its requirements as much as possible, while it actually needs only $6 million”, says the economist. This, eventually, accelerate the tensions and leads to sorts of rumors in the foreign exchange market. According to Bayramov, it would be appropriate to reduce the current sale margin rate from 4 to 2 per cent.

The banks are still reluctant to lend in local currency and have concerns regarding the process of dollarization of the deposits. They believe that to rectify the situation and to increase the attractiveness of the manat, it would be useful to increase interest rates for the deposits held in manats. According to Taleh Kazimov of Pasha Bank, in addition to decline in the quality of loan portfolios, the biggest problem is the dollarization of bank liabilities, which currently exceeds 80%.

“Following the fall in oil prices, the Russian Central Bank raised the rate of refinancing to 21% while the increase in deposit rates were 25% and higher, thus, preventing dollarization of the currency market. The same approach was used in Kazakhstan. Raising the interest rate of deposits in national currency stopped the boom associated with the conversion of funds into dollars”, said Kazimov. He also believes that at high interest rates of manat loans, the borrower will not have much incentive for converting the funds into dollars.

In his interview with Bloomberg, Chief Economist at ING Group NV, Russia and CIS Dmitry Polevoy also said that the major obstacle to a sustainable recovery of the manat is a high volume of deposits in the US dollars.

The statistical data shows that about 50% of loans and 80% of deposits are in the US dollars. Therefore, the banks need dollar reserves to be able to maintain these deposits, which is one of the reasons of the growing demand for the US currency.

On the other hand, the turnover of the US dollars in the national currency market is decreasing. According to CBA’s statistical reports, it is almost 5 times less than in the same period of the last year, being $9.3 billion in 2013-14, $12.3 billion in 2015, and only $1.2 billion over the 4 months of 2016.

Economist Fikret Yusifov thinks that this is due to a decrease in the volume of imports to Azerbaijan, as well as the low volume of manat supply.

It turns out that the key factor pulling the manat down is the banks, though they too are not happy with the current scenario and would gladly have changed it.

According to experts, the fluctuation of exchange rates will continue but at a rate as slow as it is now. Almost all of them are rather sceptic about another “shocking” wave of devaluation similar to the one happened in last December. Firstly, the negative impact of devaluation on the national economy is obvious, and secondly, there is no prerequisite for this.

The main thing that must be done today is to raise public confidence in the manat, to stabilize the currency ratios in bank deposits and loans, and to help the banking sector to overcome this difficult stage. As a result, the manat will be backed up by the market automatically, which will ultimately stimulate the development of the economy as a whole.