FUNDAMENTAL COURSE

The first half of April was marked by quite disturbing events in regional financial markets, when the exchange rates of Russian Rouble and Turkish Lira began falling almost simultaneously at the stock exchanges. Although ad hoc political upheavals in Russia and Turkey were the main reason of these events, economic consequences of currency fluctuations could influence the key trading partners of these countries.

Certain concerns were also voiced in Azerbaijan, where the talks about a possible devaluation of the national currency, Manat, began. However, both market regulators and experts unanimously affirm that there are no reasons for weakening of Manat today.

Lira and Rouble

Geopolitical tension around Turkey and Russia has eventually hit the economy of both countries, as well as their financial markets resulting in the weakening of national currencies.

On April 6, the U.S. Treasury published a sanctions list, which included 24 Russian individuals and 14 Russian companies, including entrepreneurs Oleg Deripaska, Victor Vekselberg, Igor Rotenberg, and Suleiman Kerimov; VTB CEO Andrei Kostin and Gazprom CEO Alexei Miller; companies UC Rusal, En+ Group, Bazoviy Element, Renova, and Rusal. On April 9, the Russian stock market collapsed followed by the significant growth of the rates of U.S. Dollar and Euro. After the announcement made by the U.S. President Donald Trump on April 11 about missile strikes against Syria, Euro and U.S. Dollar rose to 80 and 65 Roubles, respectively.

Later the panic was replaced by encouraging statements from the experts’ community claiming that high oil prices will help the Russian Rouble, hence a significant collapse of exchange rate is unexpected. The Central Bank of Russia even refused to call the event a “shock” using a more cautious term: “exchange rate fluctuation”. However, international analysts still refrain from making reassuring statements calling the Rouble the “weakest link” in the fixed-income instruments markets. In general, the Rouble has fallen 6.3% since the introduction of new U.S. sanctions, which is the worst result among other world currencies after the Venezuelan Bolivar. Economists consider a ratio of 66 Roubles for 1 U.S. Dollar as the optimal exchange rate for the near future.

The Turkish Lira also slipped to a record low level of 4.1 Lira per 1 U.S. Dollar almost simultaneously with the Russian Rouble. Since the beginning of 2018, Lira has fallen against Euro by 9%, which is the maximum rate among all currencies of developing countries except Argentinian Peso. One of the reasons is political factors: the deterioration of relations with the U.S., problems with NATO, situation in Syria, postponement of presidential elections. In addition, Turkey has long been experiencing inflation, which is supported to some extent by economic authorities. They believe that the low rate of Lira contributes to economic growth, increased competitiveness of the tourism sector and export of goods. They are definitely right to some extent, for according to tour operators, Turkey could attract tourists from other countries during the summer season of 2018 and even doubled the growth of bookings.

Meanwhile, any currency fluctuations hit the banking sector having a negative influence on investment decisions and lending to the real sector, let alone the growth of inflation. In any case, this is a double-edged stick. Therefore, such exchange rate fluctuations cause concerns in all countries of the world.

Azerbaijan has already experienced a devaluation shock in 2015-2016, when the Manat has fallen by more than two times against the U.S. Dollar. But last year, due to tight monetary policy of the main regulator, Manat strengthened to Dollar by 4%. Therefore, it seems that both the population and the subjects of national economy feel the stabilisation. However, the recent currency fluctuations in neighbouring countries gave rise to panic sentiments and expectations.

It is known that both Turkey and Russia are the leading trade partners of Azerbaijan. In theory, the events in these countries can in some way influence our economy as well. For statistical purposes, according to the results of the first quarter of 2018, Turkey is the third country in the list of export operations of Azerbaijan (7.77% of total exports), while Russia tops the list of import operations - 17.34% of the total import of Azerbaijan.

Keep calm!

So, is it possible that the situation with Lira and Rouble can somehow shake the exchange rate of Manat? Surprisingly, both the experts and market regulators follow the same position on this issue: in the short term, the balance of Azerbaijani economy and currency will not be disturbed despite negative external factors transpiring in neighbouring countries.

“As far as the stability of the state budget and macroeconomic situation are concerned, we do not have any fundamental risks at present,” said the Minister of Finance of Azerbaijan Samir Sharifov. Chairman of the Board of the Central Bank of Azerbaijan Elman Rustamov ruled out the possibility of a new devaluation of Azerbaijani Manat.

“Oil prices remain stable and in comparison with the past period even increased by 25%. The volume of non-oil exports also increased. Tourism is developing and incomes from the tourist sector increase. In general, Azerbaijan enjoys a period of economic activity. The current macroeconomic situation shows that any rumours about the devaluation of Manat and its weakening are useless. There are no serious arguments for this,” said E. Rustamov.

According to Rustamov, an overall macroeconomic stability is observed in Azerbaijan, the balance of payments is in the positive zone and the country's currency reserves have increased since the beginning of 2018.

“We satisfy the entire demand of banks. A sufficient amount of cash has been delivered to the country. There are no reasons for exchange rate fluctuations. I reassure that the economy as a whole is stable,” said Rustamov.

“We monitor the situation in neighbouring countries, which are our main trading partners. Changes in their exchange rates psychologically can create volatility at 0.2% or 0.3%. However, these are not serious fluctuations - the official exchange rate of the Manat is stable. We hope for normalization of the situation in neighbouring countries,” added Rustamov.

Ibrahim Alishov, Chief Executive Officer of the Financial Markets Supervisory Chamber (FMSC), said that according to FMSC surveys none of the Azerbaijani banks and their exchange offices experience problems with cash. “In general, we observe an increase in the purchase of U.S. Dollars among the population. According to our data, the average level of currency sales reached $800-1300 per individual over the last week,” said I. Alishov.

According to Abishov, the Central Bank provides banks with currency in a timely manner; current monetary policy allows solving such questions, so there is no reason for panic.

Zakir Nuriyev, Chairman of the Association of Banks of Azerbaijan (ABA), also confirmed that all popular demand for foreign currency is completely covered. At some banks, the supply of foreign currency even exceeds the demand. “It is obvious that today there are no prerequisites for appreciation of the foreign exchange rate in Azerbaijan,” said Nuriyev.

Everything will be fine

Why are the regulators right? Why are there no obvious reasons for rate fluctuations? First, the external factor determining Manat’s exchange rate is still the price of oil - the higher it is, the more realistic are the chances of closing the state budget without deficit and increasing foreign exchange reserves. Consequently, it helps CBA to manoeuvre reasonably in order to keep the rate stable during contingencies. Global oil prices currently exceed $70 per barrel, which is more than the estimated price of $45 per barrel approved in the state budget and the budget of the State Oil Fund of Azerbaijan. Thus, there should not be any problems with the implementation of the state budget in 2018. Naturally, this has a positive effect on the national currency. In addition, according to financial expert Jalal Naghiyev, Azeri-Chirag-Guneshli and Shah Deniz projects for the development of offshore hydrocarbon fields of Azerbaijan are actively implemented in 2018-2019, hence the country receives bonuses from foreign partners that supplement the currency reserves of Azerbaijan.

He also pointed to the large-scale growth of tourism industry in Azerbaijan and the private sector. “Entrepreneurs have become more active in applying for loans, taking into account the government's positive steps to develop projects in small and medium-sized businesses,” the expert believes.

Economist Samir Aliyev noted that the capital outflow from Azerbaijan has been reduced for the second year in a row, and the foreign trade balance is positive due to the prevalence of exports over imports. “Obviously, CBA is not interested in strong Manat but it will not allow it to be devalued either. Devaluation is economically unprofitable and can jeopardize our banks, which the CBA and the government cannot afford,” said the expert. He added that in April, amidst the situation in Russia, some Azerbaijani banks wanted to speculate on currency hype. “But CBA regulates the situation with the currency in the country, and the Manat rate is stable,” said S. Aliyev. According to him, by the end of the year the rate will remain at the level of 1.70-1.72 Manat per U.S. dollar.

Another expert, Jafar Ibrahimli, as a confirmation of the stability of the situation on the financial market, led to a reduction of CBA’s interest rate from 13 to 11%, which was the result of a drop in inflationary expectations. “One can say with confidence that CBA decided to increase the money supply within the framework of its soft monetary policy. The Central Bank has a serious information and analytical base, and if it observed at least any pressure on Manat, it would never go on reducing the interest rate,” J. Ibrahimli added.

Thus, in the near future, there are no obvious economic reasons for Manat fluctuations. Regardless of the situation in neighbouring countries, Azerbaijani currency is able to remain stable. This can contribute to a faster development of the banking and real sectors of the national economy.