LIBERAL OR CONTROLLED?

Economies of many countries have largely recovered since the beginning of the year. Forecasts for global growth have also improved thanks to the launch of large-scale vaccination campaigns against COVID-19 and support measures from the leading regulators of the global market. According to the July estimate of the International Monetary Fund (IMF), global GDP growth in 2021 will be 6% after declining by 3.3% in 2020. The forecast for 2022 has been improved to 4.9%. In these conditions, global financial markets show favourable trends. Stock indices in the US and emerging markets (EME) have reached new all-time highs, oil prices returned to pre-pandemic levels. Considering these trends, some experts suggest continuing the reforms of the foreign exchange market in Azerbaijan set to be realised even before the pandemic.

Global market risks

Although the situation in the global financial markets remains generally stable, the risks of a resumption of negative trends still persist because of the following two factors. First, the expectations for accelerating inflation are growing globally, given the continued stimulation of budgetary policies in the US and other countries. This has significantly increased the treasury bond yields in the US since early 2021 and, as a result, boosted the rates in other countries.

Secondly, uncertainty has increased since the end of March, when the number of infection cases increased again, followed by the extension of restrictive measures in a number of countries in Europe and Asia. In parallel, there is a growing vulnerability of the global financial system, which can increase volatility in the markets during periods of stress.

The key problem for many countries in this case is the increasing number of the so-called zombie companies in the corporate sector amid the significant material support measures introduced during the pandemic. Risks of insolvent companies, serious losses in the banking sector with low profitability (mainly in Europe) can become systemic in nature and limit the possibilities of providing new loans. As another side effect, massive support measures, primarily budgetary spending, may accelerate the inflation in leading countries. This may further increase the interest rates, and uncertainties about the future of economic policy in general. Certainly, it may burst volatility in the financial markets. In addition, an excessive increase in public debt may undermine the confidence of market participants in the stability of public finances, which may in turn increase sovereign credit risks.

However, despite the instability of global financial indicators and uncertainty about external challenges, as well as very ambiguous forecasts for the near future, the situation in Azerbaijan is under control. The government promises that a stable macroeconomic situation and the presence of a safety buffer thanks to the growing foreign exchange reserves will help maintain the stability of the national economy.

Do we need liberalisation indeed?

Meanwhile, the deputy of the Milli Mejlis Vugar Bayramli believes that given the volatility in the global market, the Central Bank of Azerbaijan is advised to gradually liberalise the national currency market.

He believes it is possible as the US dollar in the global market continues to strengthen compared to other major currencies. Over the past month, dollar’s exchange rate has risen by almost 4% against euro: “Strengthening of the dollar is associated with positive news and forecasts for the US economy, as well as with the increasing value of the shares of technology companies. On the other hand, the vaccination of for more than half of the US population is also affecting dollar’s exchange rate.”

The strengthening of dollar did not pass unnoticed for a number of strategic goods. Over the past month, global gold prices fell 2.8%. As an exporter of gold, this trend reduces Azerbaijan’s gold revenues.

According to Mr. Bayramli, Russian rouble has lost about 3% over the past month, although amid the strengthening position of the US dollar in the world market, there is no serious volatility in the markets of the regional countries.

“Since the Azerbaijani manat is not floated completely, its exchange rate still directly depends on the position of the regulator. Global oil prices, which play an instrumental role in the flow of foreign currency into the country, are at a fairly acceptable level,” Bayramli said.

Currently, Brent crude is trading above $74 per barrel, and the energy market is seeing a growing demand due to global vaccinations. At the same time, in the state budget for 2021, the oil price is set at $40 per barrel, Nevertheless, Bayramali believes, the liberal foreign exchange market is safer in the long term, if we take into account the risks of new surges in global markets.

It is worth noting that according to a relevant budgetary rule, which set the current minimum oil price at $40 per barrel, the government sterilises the national economy from excess foreign currency inflow from oil sales by channelling this amount not to the budget, but to the State Oil Fund of Azerbaijan. Therefore, this money does not seriously affect the exchange rate of manat.

But V. Bayramli righteously noted that there was no expected risk from falling oil prices to the exchange rate of manat, at least in the next few years. Moreover, global commodity traders expect oil prices to return to $100 per barrel due to reduced investments in oil and gas projects. According to experts, capital expenditures of oil companies fell from $400 billion (five years ago) to $100 billion a year.

According to the head of research department of commodities for Goldman Sachs, Jeff Curry, a new supercycle is expected in the commodity market. He noted that the demand for oil will grow as politicians direct investments in large green infrastructure projects: “We believe that every $2 trillion spent on green capital investment means about 200,000 bpd of demand for oil".

Statistical data

Elman Rustamov, Chairman of the Central Bank of Azerbaijan, is also convinced that the upward trend in global oil prices has a positive effect on the stability of the foreign exchange market, improving the balance of payments and expectations.

As a result, the current account balance shows a surplus of $627.7 million. Surplus in the oil and gas sector in the first quarter of 2021 reached $1.9 billion (a decline of 19.9%), while the deficit in the non-oil sector was $1.3 billion. (down 26.1%).

The average oil price in January-March 2021 was $52.4 per barrel against $58 a year earlier.

Thus, Elman Rustamov believes that Azerbaijan has enough resources to maintain the balance of the foreign exchange market and current macroeconomic stability.

Last time, the Central Bank decided to liberalise the exchange rate of manat at the beginning of 2020 to improve the business environment for entrepreneurs. According to these changes, with advance payments for imported goods, the period for submitting to authorised banks a customs declaration confirming the import of goods into Azerbaijan, or a document on the provision of services, was extended from 270 days to 2 years. At the same time, the requirement to inform the foreign exchange control body has been eliminated if the cost of imported goods and services did not exceed the equivalent of up to $10,000.

In other words, there are only few changes in the general mode of manat’s exchange rate. But does it really make sense to change everything completely? Will the market be able to adapt to the new conditions, given that we have not recovered from the pandemic completely?

Unlike the supporters of liberalisation of monetary policy, the other camp believe that this process does not always have a positive outcome. Before making such a serious decision, it is necessary to clearly control the degree of its influence on the national economy. Otherwise, this may cause the outflow of capital from the country, increase the level of dollarisation and the country’s external debt.

Can liberalisation in Azerbaijan really increase the investment activity so that the capital will be regulated by the economic interests of investors? Or maybe it causes a greater outflow of capital? After all, any such extremities, especially in years of poor external economic conditions, can be dangerous for the country's balance of payments and the stability of manat.

According to the CBA, in the first three months of 2021, capital outflow from Azerbaijan reached $1.3 billion. In the first quarter of last year, it was $990 million. In other words, the capital outflow from Azerbaijan for the specified period increased by 29.1%.

The volume of capital outflow between 2019 and 2020 also showed an increase of 38.8%, reaching $4.5 billion. According to economists, the reasons for the growing capital outflow are associated with its investments in real estate and business in mainly Turkey and Georgia, which has become a trend in recent years.

It is rather difficult to reliably predict the consequences of currency liberalisation. To do this, one should take into account the expectations of large capital investments in the restoration of destroyed territories in Garabagh, the mode of currency exchange rate, which should be comfortable and predictable both for internal and external investors. Therefore, it seems that any changes that can seriously affect the rate of manat, especially in the current conditions, should be made with caution in order to avoid any possible negative consequences.