A STABILIZATION TOOL

The sharp landslide of global oil prices has forced many oil exporting countries to use the foreign currency reserves to recover the budget deficit.

Currently, the largest spender of foreign currency reserves is the leading oil producer in the world, the Kingdom of Saudi Arabia. In the third quarter of 2014, the Saudi currency reserves were estimated at $745 billion while by the end of 2015, they fell to $616 billion.

The start of 2016 was even more discouraging for oil producing countries. Only recently, it appeared that the oil price could stay at a more or less stable level of $50 per barrel. And it is not surprising that, despite the significant reduction in budget expenditures for the payment of civil servants in Saudi Arabia and a marked decline in construction in the scope of the country, foreign exchange reserves Saudis have fallen by $54 billion during the 8 months of 2016, falling to $562 billion.

Oil and oil products are the main export products of Azerbaijan, as well as Saudi Arabia. Of course, the oil production and export scale is less than that of Saudi Arabia, yet the fall in oil prices continues to impact national financial system. The strategic currency reserves of Azerbaijan in comparison with the third quarter of 2014 decreased by $13.8 billion, falling to $38.59 billion by 2015, of which the share of the Central Bank of Azerbaijan totaled $5 billion, and the SOFAZ - $33.59 billion.

But in 2016, the situation has changed considerably. After three quarters of this year, foreign exchange reserves of the country, in comparison with the beginning of the current year increased by $1.364 billion (total: $39.95 billion). It was possible due to intervention of SOFAZ, the reserves of which have increased to $2.248 billion since the beginning of 2016, while the Central Bank’s reserves fell by $884 million (total: $4.132 billion).

However, the national financial system has not completely stabilized yet. The tense situation continues to be observed in the banking sector: by October 26, 612.6 million Manats were paid to the depositors of ten commercial banks declared bankrupt by the Azerbaijan Deposit Insurance Fund (ADIF). The state provides assistance even to the country's largest bank, the International Bank of Azerbaijan (IBA). It is clear that the situation in the remaining thirty banks is not encouraging. However, without an effective banking system is impossible to solve the problem of stable economic growth. That is, the systemic banks are needed for large projects to expand the areas of crops, to create new capacities in processing industries, which would be willing to finance commercial projects.

Currently, SOFAZ deposited $1 billion to IBA for a period of one year at a rate of 4% per annum. In accordance with the statutes of the Fund, it may transfer up to 5% of its total assets for the development of the domestic market. Accordingly, SOFAZ may transfer an additional $790 million to the accounts of banks selected by the government, which in turn may credit businesses dealing with major economic projects.

The transfer of SOFAZ funds to the leading banks not only can stabilize the country's financial system, but can also give impetus to the development of non-oil sectors of economy.

However, in the first three quarters of 2016, SOFAZ transfered 3.26 billion Manats to the budget, which means a total of 7.615 billion Manats annually, i.e. 43% of funds.

Thus, if the budget still requests the entire required amount, the growth of SOFAZ assets will be less. As of September 30, 2016, SOFAZ assets amounted to $35.8 billion, of which $1.9 billion is kept in Azerbaijani Manats, the rest is in other currencies. According to the CEO of SOFAZ, Shahmar Movsumov, it is the first time that Manat is among the Fund’s currency pool, as the state budget does not funds for now. However, this reassuring statement that the assets will remain at about $34 billion, still means that SOFAZ awaits a request from the state treasury.

Anyway, in order to stabilize the national currency, it is necessary to produce more marketable products, primarily in the non-oil sectors of economy. SOFAZ’s role in this regard can significantly grow in the country's financial system, if along with large investments abroad, the funds will be increasingly used for internal lending.

SOFAZ's investment portfolio in the first three quarters of this year was $33.95 billion, of which 79.3% were invested in securities and bonds, 5.3% in real estate, 11.6% in shares, and 3.8% in gold. Geography of the SOFAZ assets is as follows: 41.6% - Europe, 27.3% - Asia Pacific, 24.1% - North America, 3.9% - Australia and New Zealand, 0.4% - the Middle East, 0.1% - South America, 2.6% - international financial institutions.

Undoubtedly, the use of financial instruments and investment placement geography indicate that a significant work has been implemented to ensure the safety of the funds for future generations. But this structure and the arrangement was more relevant during high oil prices, when SOFAZ was responsible for preventing the "overheat" of the national economy through the seizure and storage of large financial revenues from oil in the Fund.

However, today the economic situation is different. It would be better if SOFAZ has become a financial center for economic recovery. That is, by adding large deposit investments in local banks similar to IBA practice, the SOFAZ could greatly facilitate the financing of commercial projects for the development of local production.