CBA to help banks reduce impact of manat weakening on their activity

Baku, Azerbaijan, Feb. 26

By Azad Hasanli - Trend:

The Central Bank of Azerbaijan (CBA) can assist banks of the country to minimize the impact of the weakening of the manat on their activity, the head of the Association of Banks of Azerbaijan (ABA) Eldar Ismayilov said.

The cheapening of manat will adversely affect the capitalization of the banking sector of the country due to the fact that banks have a large number of loans in foreign currency and are subject to losses on short currency positions, according to the report of the international rating agency Fitch Ratings, released Feb. 26.

"Any significant changes in the monetary and loan system of the country have an impact on the activity of banks," Ismayilov told Trend. "This also applies to those banks, which have attracted a certain number of credits in dollars and euros from abroad. Basically the matter rests in large banks, this factor will not affect small banks that didn't attract funds in foreign currency."

Head of the ABA believes that the central bank will prepare a specific program, and the measures which will be taken within its framework, will make it possible to mitigate the impact of the weakening of the manat on the activity of banks.

"Not only the Central Bank, but also the ministries of economy and industry, taxes and the State Customs Committee have to mitigate the tax burden on local businesses to some extent. I hope that the money power of the country in the near future will prepare some comprehensive program so that all the structures of government worked together to stabilize the current situation," he said.

At the same time, Ismailov believes that any administrative measures may have only a temporary effect in this situation, but the real development is possible to be only provided by economic mechanisms.

Foreign currency loans at the end of 2014 accounted for 27 percent of all loans in the sector (about 33 percent since the cheapening of the manat). At the end of 2014, the banking system of the country had a significant short currency position in the amount of $ 1.7 billion, or 43 percent of the capital of the system, according to the Fitch's report.

"We believe that this position was only partially hedged, which makes the capital of banks to a large extent subject to risk of depreciation of the national currency," said the analysts of Fitch. "Short positions on the balance sheets of banks are likely to have increased further since the beginning of 2015, as investors transferred their savings in foreign currency. This effect could be partially compensated by currency swaps, which are offered by the central bank of the country since January 2015."

The agency estimates that some banks may have violated regulatory requirements on capital adequacy. "However, we believe that the regulator may permit a derogation from the requirements in order to help banks to formally implement them, as it was in Russia," said the report.

On February 21, the Central Bank of Azerbaijan has set the dollar exchange rate at 1.05 manats per dollar, compared with 0.7844 manats earlier, which corresponds to cheapening of rate by 33.9 percent.

The official exchange rate of the US dollar to the Azerbaijani manat on February 26 is set at 1.0501 manats.

Edited by CN

Follow the author on Twitter: @AzadHasanli

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