Current SOFAZ’s asset distribution contributes to preservation of reserves in long term
Trend interviewed head of State Oil Fund of Azerbaijan (SOFAZ) Shahmar Movsumov
Activities of the State Oil Fund of Azerbaijan (SOFAZ) in 2016 can be assessed as successful, Movsumov said.
In the conditions of low oil prices, decrease in state revenues from oil sales and decay in the oil sector, the Fund’s role in supporting Azerbaijan’s financial stability significantly increased, he said.
"In 2016, SOFAZ carried out timely transfers to the state budget and also continued financing important infrastructure and social projects, for example, a project on improvement of social conditions for IDPs, a project on reconstruction of the Samur-Absheron irrigation system and a project on construction of the Baku-Tbilisi-Kars railway," Movsumov said.
"In 2016, SOFAZ also financed Azerbaijan’s share in the Southern Gas Corridor projects, as well as the construction of the STAR oil refinery in Turkey. In addition, the Fund continued financing the state program on education abroad," Movsumov added.
He noted that in late 2015, changes were made to the investment policy of SOFAZ. As a result, the balance of risks and return changed in favor of more profitable financial instruments, which is a part of a long-term process of building a balanced investment portfolio, he added.
"For example, the permitted share of investment in real estate doubled (from 5 to 10 percent). As a result of these changes, this year the share of direct investment in real estate as well as investment via real estate funds increased. In 2016, the purchase of Palazzo Turati office building in Milan was completed. A big amount of investment was put in real estate funds and investment was also put in private equity funds. The portion of funds that can be invested in stocks also increased," SOFAZ head added.
Total revenues of the State Oil Fund of Azerbaijan (SOFAZ) are expected to be $5.8 billion in 2016 instead of the forecast $2.8 billion, Movsumov said.
Movsumov noted that SOFAZ’s budget and the state budget for 2016 were prepared on the basis of oil price of $25 per barrel.
Therefore, considering this oil price, the revenue part of SOFAZ’s budget was forecast at $2.8 billion, explained the executive director.
"Meanwhile, the average price for a barrel of oil was $41.7 during 2016, as a result of which the Fund’s total revenues are expected at $5.8 billion," he added.
Movsumov also said that depending on the rate differences which may arise as a result of changes in exchange rates of currencies included in the investment portfolio, the Fund’s USD assets may increase or decrease at the end of 2016 in line with the volume of the rate difference.
In the long term investment period, SOFAZ seeks to create a highly balanced global portfolio by increasing the share of riskier assets, according to Movsumov.
“For this purpose, the Fund plans to increase the proportion of financial instruments that promise high profit in the long term, for example, stocks. At the moment, additional investment into stocks is planned as part of the existing investment policy. For example, SOFAZ has recently announced a tender to bring a new manager for stock portfolio management, and we expect to make a choice in early 2017,” he said.
SOFAZ head underlined that one of the Fund’s main goals in bringing the external managers is to use their experience in investing in certain types of financial instruments for the development of necessary skills and knowledge.
“The managers should be brought in such a way that as a result of the cooperation the level of professional training of the Fund’s staff as well as the technical infrastructure improves. Along with bringing in the external managers, the Fund also pays great attention to the development of its own human resources and operational capabilities for asset management,” said Movsumov.
Movsumov noted that a big part of SOFAZ’s budget accounts for manat expenditures, mainly for transfers to the state budget and other transfers.
The Fund’s main revenues from the sale of oil and gas are received in foreign currency, particularly in US dollars, and in order to sell the abovementioned bonds, the currency obtained from transactions is converted into manat, he explained.
In order to prevent negative impact on the market of large-scale sales of currency and for timely implementation of budget commitments, SOFAZ implements even currency sales through auctions organized by the Central Bank of Azerbaijan (CBA), added Movsumov.
Over 11 months of 2016, according to him, SOFAZ sold funds worth $4.6 billion through currency auctions.
Movsumov recalled that in April 2015, after the validation (January 2015) by the decision of the EITI International Board, Azerbaijan’s status of full member was lowered to the candidate status.
The EITI Board determined correctional measures, which should be implemented until the next validation (July 2016) in order to bring back Azerbaijan’s full member status in EITI, he noted.
In 2015-2016, Azerbaijan continued to introduce the EITI on the basis of requirements of the EITI standard, certain steps were taken in line with the correctional measures established by the EITI Board, and main work was carried out within the EITI, added Movsumov.
He said also that the next validation on the EITI was held in July 2016, as a result of which, under the decision made on Oct. 26 during the next meeting in Astana, the EITI Board, taking into account the work done by Azerbaijan, kept the country’s status as a candidate country.
Under the decision, until the next meeting of the EITI Board (March 2017), Azerbaijan should conduct correctional measures on addressing concrete issues related to the registration of non-governmental organizations engaged in the EITI process, as well as registration of grants, explained Movsumov.
Moreover, until July 2017, the Azerbaijani government on the basis of the correctional measures should address certain issues of civil society’s involvement in the EITI process, and a number of technical aspects of the Initiative’s accountability, he added.
The executive director said also that after the EITI Board’s meeting (in Astana on Oct. 24-26, 2016), the EITI Multi-stakeholder Group (MSG) of Azerbaijan started discussions on conditions put forward by the Board and it was decided to prepare a new plan of actions on correctional measures.
Azerbaijan in 2017 will continue its activity on introducing the Extractive Industries Transparency Initiative (EITI) in the country in line with all requirements, Movsumov said.