HEAVY DEBT BURDEN?

Attracting long-term funds from international donors for the implementation of various capital-intensive projects is a common international practice. Foreign borrowing is also important for Azerbaijan. In recent years, the government has demonstrated extreme caution in this matter. Such a conservative approach allows us to preserve Azerbaijan’s status as one of the most prosperous in the world in terms of the ratio of external debt to GDP. Effectiveness of this strategy was confirmed in the course of the Asian Regional State Debt Management Forum organised by the Ministry of Finance of Azerbaijan and the Asian Development Bank (ADB), which ended recently in Baku.

One of the leading countries

According to the International Monetary Fund (IMF), by the end of 2018, global public debt exceeded $69 trillion, which is more than 80% of global GDP. At the same time, about $52 trillion, or 75% of the total debt is accrued by developed countries, while in developing countries the level of public debt is relatively lower. Recently growth tendencies have also been observed in developing countries as well. Compared with indicators of 2012, national debt in developing countries grew by 50% by the end of last year.

Remarkably, for many years Azerbaijan has been one of the leading developing countries in terms of external debt obligations. Even during the global financial crisis of 2008, the government began to pursue a very conservative policy with regard to foreign borrowing: in particular, the rules for attracting external funds by state organizations were tightened, and clearer obligations of private banks and companies were formulated in terms of the funds raised and the terms of their repayment. Even earlier, in 2005, the government restricted cooperation with the world's leading donor IMF, reducing contacts to the level of consulting and technical assistance, completely refusing to borrow from the fund.

Thanks to these and a number of other measures, in terms of total external debt to GDP ratio, Azerbaijan has taken one of the leading positions in the post-Soviet space over the past decade. Moreover, the indicators of Azerbaijan remained one of the best in Central and Eastern Europe. Thus, if in 2003 the amount of foreign debt per capita exceeded the amount of budget revenues per capita, by 2011 this ratio had changed and the level of per capita income exceeded the external debt by 4.2 times.

The main criterion in evaluating the level and rate of growth of foreign borrowing is not absolute numbers, but the ratio of external debt to GDP. Thus, according to international financial organizations, the threshold mark when a threat to sustainable external debt management arises is considered to be an excess of 40% of the level of annual GDP. However, for candidate countries to EU members, the maximum amount of external debt is set even at the level of 60% of GDP.

A decade ago, it was about 6-8% in Azerbaijan and did not exceed the threshold of 10% until the beginning of the 2014 global energy crisis. Certainly, the reduction in government revenues due to the fall in oil prices had a negative impact on the ability of borrowers (mainly government agencies) to accumulate funds for debt payments, and the depreciation of the national currency during two devaluations automatically increased foreign debt in manat terms.

But even in the current difficult conditions, the government once again demonstrated a well-considered and cautious policy regarding foreign borrowing.

This is, in particular, evidenced by the review of the international rating agency Moody's "On the forecast of the solvency of the CIS countries for 2019". According to the survey, at the beginning of this year, the level of our country's external debt was one of the lowest among the CIS states. Moreover, Moody's experts note that in all CIS countries, with the exception of Azerbaijan and Russia, foreign debt exceeds 50% of GDP.

Leading by all parameters

The proof of the low level of public debt in Azerbaijan and its qualitative restructuring is the BB+ credit rating recently assigned to Azerbaijan by the Russian rating agency RAEX. According to agency estimates, the stable rating reflects a sufficient level of Azerbaijan's solvency and, among other things, is due to the low level of public debt: the estimated ratio of public debt to GDP for 2018 is 19.4%. "The state debt of Azerbaijan is well structured by maturity, and only 2.3% of foreign debt relates to short-term borrowings. Since 2016, the volume of the country's international reserves has continuously increased, and as of 2018, their level increased by 5%, covering fivefold all expenses on external public debt ", RAEX reports.

Another indicator of the state of external debt is the ratio of the sum of external borrowings to annual export volume, which reflects the country's ability to repay current debt obligations. World Bank (WB) uses this indicator as one of the criteria for the classification of debtor countries. Moreover, the critical level is considered to be the excess of the amount of debt in 220% of exports, while the optimal indicator is 132%. Thus, in Azerbaijan, which exported $20.8 billion worth of products in 2018, the cumulative amount of public debt was more than two times less than the export figure.

In terms of the country's solvency, a growth of state debt by 25% or more in one year is considered a dangerous change in the debt indicator. In Azerbaijan, this indicator did only decrease last year by 5%.

The ratio of public debt to public revenues is also used to evaluate the debt sustainability of sovereign borrowers. At the same time, a debtor country performing by 250% of this parameter is considered a debt sustainable country. Again, our country is far from this dangerous level too.

A positive trend is also observed in the ratio of the annual amount of payments for the repayment and servicing of external debt to the annual export volume, as well as in the ratio of the volume of accumulated gold and foreign exchange reserves and the annual amount of payments for servicing the external debt of the country.

Reduction strategy

Azerbaijan’s external debt mainly consists of loans from international financial institutions (IFIs) for infrastructure projects and financing programs, as well as funds raised through the placement of securities in international financial markets.

In general, according to World Bank, IMF, ADB and several other IFIs, the current state of Azerbaijan’s external debt allows the government in the medium term not to abandon external borrowing, which is an effective means of lending to the country's economy. The loans taken from IFIs are attractive not only for low interest rates and long return periods, but, above all, they create better conditions for the implementation of projects and provide transparent control over the spending of borrowed funds. This is especially true when implementing large-scale and capital-intensive infrastructure projects - the construction of power plants, the construction of transmission lines, pipelines, roads, canals, etc.

"Currently, our foreign debt is at a fairly low level, approximately 19% of GDP. Available foreign exchange reserves exceed the external debt by five times, which, if necessary, allows us to pay off all foreign debt during a year," President Ilham Aliyev said at the second forum One Belt, One Road in Beijing in April 2019.

However, despite the relatively low level of public debt, the government believes that the country should continue measures to further reduce its level. According to the Medium- and Long-term Debt Management Strategy approved by President Aliyev on August 24, 2018, the most important task of the coming years is to reduce the level of external debt to 10% of GDP.

According to the strategy, in 2019, Azerbaijan’s external state debt will reach $9.7 billion. However, by 2025, the size of external debt is planned to be reduced to $6.5 billion, and, according to government estimates, by 2026 Azerbaijan’s foreign debt will decrease to 12% of GDP.

From foreign currency to manat

The current state and the government’s strategy for public debt management and reforms in this area were discussed at two major events in Baku in May. The first is a meeting of the working group of the International Organisation of Supreme Audit Institutions (INTOSAI), organised with the support of the Accounts Chamber of Azerbaijan. Chairman of the chamber, Vugar Gulmammadov, emphasized the important role of state debt control, which serves to prevent possible risks and ensures the country's economic security.

At the Asian Regional Forum on Public Debt Management, Finance Minister Samir Sharifov said that the adoption of the said public debt management strategy has become an important part of the reforms of recent years. This, according to the minister, made it possible by the beginning of the current year to reduce foreign currency debt from 24 to 19% of the country's foreign reserves. Including, it was possible to reduce state debt in foreign currency by 17% in the share of GDP, and today Azerbaijan’s nominated foreign currency debt amounts to only 1/5 of the country's total income.

As of January 1, 2019, Azerbaijan’s direct and guaranteed external state debt slightly exceeded $8.9 billion (decrease of 5% over the past year). According to Minister of Finance, the figures for the first quarter are slightly different from those at the beginning of the year, respectively, more recent information on the national debt is planned to be published based on the first half of the year.

According to the head of the state debt analysis department of the Accounting Chamber, Vugar Ibrahimov, 92% of the national debt at the beginning of this year was foreign debt (₼15.2 billion), and 8% - internal (slightly more than ₼1.3 billion). The volume of public debt per capita at the end of 2018 is estimated at around  ₼1,654,000. The bulk share of the national debt was government bonds (₼1.06 billion). Total liabilities of the Central Bank and other debts as a whole reached about ₼260 million.

Thus, despite the growth of 28.3%, the share of domestic borrowing in the structure of the country's total public debt is still extremely low.

However, this proportion may soon change, as evidenced by recently announced plans to continue reforms in public debt. "Azerbaijan is planning to develop mechanisms to improve public debt management. For example, we plan to reduce public debt in foreign currency, replacing it with national currency: this scheme will greatly enhance the stability of government debt regulation," Sharifov said, adding that the details of the transfer mechanism will be announced later.

It is expected that the replacement of external debt from U.S. dollars to other international currencies and manat will help increase debt sustainability and strengthen Azerbaijan’s potential for better resistance to external economic shocks.