Baku, Azerbaijan, Aug. 24
Standard & Poor's Ratings Services estimates the trend of intensifying economic risks in the banking sector of Azerbaijan as "stable" and expects that the banking structure, as a whole, to remain unchanged, S&P said.
Unlike banks in peer countries such as Hungary or Georgia, Azerbaijani banks had limited risks from foreign currency lending before 2015. This was due to the Central Bank of the Republic of Azerbaijan (CBAR) maintaining a fixed exchange rate for the manat against the U.S. dollar.
However, the manat depreciated by 33% in February 2015. Consequently, lower confidence in the manat has led to currency imbalances in banks' balance sheets as customers converted their manat deposits into foreign currency.
In our view, this could continue for a long period, putting additional strain on the sector's financial performance and liquidity management. That said, we already incorporate this in our assessment of the country's extremely high credit risk in the economy and very high risk of systemwide funding, S&P said.
In our view, Azerbaijan's economy is currently facing a number of pressures related to the sizable decline in oil prices over the last year. Azerbaijan remains heavily dependent on the hydrocarbons sector, which amounted to about 40% of GDP and 95% of merchandise exports in 2013-2014, S&P said.
Primarily as a result of lower oil prices, we expect Azerbaijan's current account surplus to moderate to an average 5% of GDP over 2015-2018 as opposed to double-digit surpluses over the past eight years. We also project the general government sector to show a deficit of nearly 9% of GDP in 2015 following years of surpluses.
Credit risk in the economy is extremely high, in our opinion. Recent rapid growth of household and corporate debt is exacerbating risks brought by the decline in commodity prices, although leverage metrics remain low in a global context. Over the past few years, lending in foreign currency has fallen gradually, due to the stability of the local currency. At the same time, owing to the large shadow economy, it's difficult to assess the debt-servicing capacity of economic agents and therefore the true level of problem loans; the domestic regulators have reported nonperforming loans as representing 5.9% of system loans as of March 31, 2015. Overall, we believe Azerbaijan's commodity dependence and a substantial drop in oil prices over the past year may erode banks' asset quality.
Standard & Poor's Ratings Services classifies the banking sector of the Republic of Azerbaijan (BBB-/Negative/A-3) in group '8' under our Banking Industry Country Risk Assessment (BICRA) methodology. A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. A BICRA is scored on a scale from '1' to '10', ranging from the lowest-risk banking systems (group '1') to the highest-risk (group '10').