Transfer of Azerbaijani Banks to Conservative Policy will Lead to Slower Growth Rates of Businesses

Azerbaijan, Baku, 24 November/ Trend corr. I.Khalilova/ A declaration of the G-20 summit on financial markets and world economy, which was adopted at the last meeting in Washington, can enable to weaken acuity of problems with liquidity at foreign markets.

In the light of worsening state of the world economy, G-20 countries agreed to enable countries with developing market economy to get access to financial means, including through support to ensuring liquidity and assistance programs, under the current difficult financial conditions.

Azerbaijan, as other developing countries, which are still demonstrating good economic growth, experiences negative influence of slowdown of global development rates. A major influence includes growing problems with liquidity at foreign markets, which made the National Bank of Azerbaijan (NBA) to resort to serious actions, demonstrating necessity of preparedness unfavorable situation of the world financial market. To maintain financial sector, the state bodies corrected leverages of monetary and loan, as well as fiscal policy, simplifying demands for required reserves and granting tax remissions targeted by bank at release of profits, to capitalization on the medium-term base, payment of income tax (from 1 January in 2009), which will provide additional liquidity and stability in this segment of the market.

The Board of the NBA has decided to reduce refinancing rate from 15% to 10% interests, top limit of interest corridor - from 19% to 15% and the lowest - from 5% to 1%. Rates of required reservation on baking liabilities both in national and foreign currencies were reduced from 12% to %9 and rate of required reservation on foreign liabilities - from 5% to 0.

Reduction of reservation rates will bring additional liquidity at AZN 220mln to banking sector, which exceeds 20% of banking assets. The government deposited AZN 50mln in the public budget-2009 to provide liquidity of a banking sector.

However, banks continue to maintain interest rates on issuing loans at a high level, which enables to compensate growth of expenditures on the involved means. Recently, rates on banking loans in national currency for juridical figures rose from 15.33% to 16.10% interests on 1 October in 2008. At the same time, manat holdings of individuals rose from 19.98% to 21.21% interests. Banks of the country cut rates on holdings of domestic economy in foreign currency from 21.78% to 21.5%, while loans in foreign currency for juridical figures fell from 14.64% to 11.98% interests on 1 October in 2008. As a result, growth rates on manta loans averagely make up 1.19% and cut of cost of resources in foreign currency - 2.45%.

If banks lose while loaning economy because of high inflation ratio in the country, people's real purchase capability drops at deposit market. Thus, interest rates on banking deposits are lower than the current inflation.

Average interest rate on banking deposits in manta amounts to 12.3% on 1 October and inflation ratio level - 21.5%. Moreover, it is still two years that this imbalance lasts.

Azerbaijan has seen sharp rise in inflation since 2007 (following rise in prices of energy sources and other tariffs). However, on background of ongoing processes all over the world, the growth rates of index of consumer prices in the country are expected to fall because of decline in import of inflation.

The positive factor is that in spite of current situation, the volume of deposits did not change considerably in a year, in other words, inflation's exceeding income of deposits did not cause outflow of deposits from banks. Quite on the contrary, the volume of bank deposits increased by 38.5% in January to September 2008 an annualized pace and  by 26.2% during the nine months whereas these indicators were 60.6% and 36.2% respectively last year which points to fall growth rates of deposit base, but not drop in volume.

The key reason for rise in volume of bank deposits with growing inflation of income of deposits is due to the absence of alternative financial instruments in financial market to deposit free funds.

In fact, in September 2008, deposits of Azerbaijani banks fell by 1.7% which took place on  the background of rise in deposits by physical persons by 1.5% ((+26.2% in Jan-Sept) and drop in the volume of deposits by legal entities by 4.3% (+26.2%). Meanwhile, banks considerably reduced proposals on loan agreements and in September rise in crediting by banks made up 2.3% compared to 5.5% a year ago.

The fall in the volume of crediting is also due to the transfer of banks to more conservative method of work.

Meanwhile, rates of attracting funds by banks in national currency rose for legal entities from 9.28% in early October of 2o07 to 10.93% in 2008 and from 12.39% and 12.87% for physical persons. At the same time, the rates of deposits in foreign currency for physical persons dropped from 12.82% to 12.53% for the last year whereas these indicators fell from 9.47% to 5.13% a year during the same period of 2008.

Banks plan to make changes in their tariff policy during formation of budget for 2009. Bank are obliged to re-assess their risks and examine strategy of development of for medium-term perspective as global financial crisis shifting to economic recession will cause a new wave of financial crisis in future. Therefore, growth rates of business and income of Azerbaijani banks and bank system of neighboring states can slow down due to complicated market conditions.

According to the National Bank of Azerbaijan, in September 2008, the number of Azerbaijani banks making profits increased from 36 to 38 while this number remained the same as compared to September of 2007.  The total income of bank system increased by 62.8% as compared to October 2007 to AZN 179.62mln. In September, the number of banks with profits increased while total profits went up by 9.2%.

The number of banks with losses dropped by double compared to August and thrice as compared to the beginning of the year. As a result, losses of seven banks made amounted to AZN 12.33mln which is more than the indicator of early 2008 by twice.

The correspondent can be contacted at: [email protected]

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