Azerbaijan’s State Oil Fund to continue investment activity within existing rules and policy (Interview)

Finance Materials 13 March 2020 17:18 (UTC +04:00)
Azerbaijan’s State Oil Fund to continue investment activity within existing rules and policy (Interview)

BAKU, Azerbaijan, March 13

By Nargiz Ismayilova – Trend:

State Oil Fund of Azerbaijan (SOFAZ) continued its investment activities in 2019 within the existing Investment Rules and Investment Policy, which are the main approved regulatory acts, SOFAZ Executive Director Israfil Mammadov said in an interview with Trend.

“The key investments were made into financial tools with fixed-income, shares of private companies, gold and real estate in 2019 as in previous years,” Mammadov noted. “According to the investment policy, in order to diversify the portfolio, SOFAZ began investing in real estate in 2012.”

The executive director said that the first investments were made directly into real estate, located in the central regions of the capitals of highly developed countries, with stable and long-term rental income.

“The fund has gradually redirected its focus to foreign real estate investment funds since 2015, finding this type the most attractive, as they increase purchasing power and can diversify the real estate portfolio by strategy, sector and country,” Mammadov added.

“Joint investments with managers of leading companies specializing in real estate investments have also been started,” the executive director said.

“SOFAZ has made several new investments through funds managed by such companies as PGIM, Gaw Capital Partners, PAG Investments and Blackstone Group in 2019,” Mammadov added.

“According to the SOFAZ budget for 2020, the funds are not planned to be allocated for financing the Southern Gas Corridor project,” the executive director said. “Through investments in the authorized capital of the Southern Gas Corridor CJSC, SOFAZ invested a total of $1.2 billion and $2.5 billion through long-term acquisition of valuable securities of the company.”

“The project is currently financed through syndicated loans issued by international financial institutions and export credit agencies, as well as through the issuance of securities by the CJSC,” Mammadov added. “The state’s share in company's capital is 51 percent, and SOCAR - 49 percent.”

“One of the goals of creating SOFAZ is to finance strategic projects for the country's socio-economic development, as well as the accumulation of profit from oil sales for future generations to ensure a fair distribution of income between generations,” executive director said. “Among many projects funded by SOFAZ, some are social in nature.”

"One of them is the financing of measures to improve the social conditions of refugees and internally displaced people, which has originated in 2001,” Mammadov said. “Over the period from 2001 through 2019, 2.5 billion manat ($1.5 billion) was allocated to finance these procedures, including 200 million manat ($117.6 million) in 2019. A huge work has been carried out over these 19 years. Some 72 settlements with private buildings, as well as 22 districts with multi-storey buildings were created. As a result, 36,752 families were provided with comfortable houses.”

“Moreover, 83 schools, five hospitals, kindergartens, medical centers, administrative buildings and other facilities were built,” executive director said. “Some 53 communication centers, 803 kilometers of roads, 1,794 kilometers of power lines, 503 kilometers of gas pipelines, water supply lines and other communication lines, as well as a number of smaller facilities for economic use were commissioned. These measures helped to greatly improve the quality of life of the most socially vulnerable layers of the population - refugees and internally displaced people.”

“Another landmark project sponsored by SOFAZ is the financing of training of Azerbaijani youth abroad,” executive director added.

“The program, which is an important part of the strategy announced by the Azerbaijani president to turn 'black gold' into 'human capital', covered the period from 2007 through 2015 and was worth 212.7 million manat ($125.1 million),” Mammadov said.

“The beneficiaries of the program are about 3,500 students beginning from undergraduate and ending with doctoral degree in such fields as economics, finance, medicine, law, engineering, IT, education, social sciences and others,” executive director added. “Among the main countries in which students were educated are the United Kingdom, Turkey, Germany, the Netherlands, Russia, Canada and others.”

Mammadov added that SOFAZ plans to continue financing the project on improving the social and living conditions of refugees and internally displaced persons (IDPs) in Azerbaijan for 2020.

“To finance this project, SOFAZ has allocated 200,000 manat ($117,647) from its current budget,” executive director said.

The executive director noted that a new educational state program has recently been approved to increase the international competitiveness of the higher education system in Azerbaijan for 2019-2023.

“This project is aimed at financing the training of future scientists in doctoral programs at leading world universities, as well as a number of selected joint programs developed within the agreements between Azerbaijani and international universities. The amount of expenditures under this budget envisaged for 2020 is 10 million manat ($5.8 million),” Mammadov added.

“Transfers from the State Oil Fund of Azerbaijan to the state budget will amount to 11.4 million manat ($6.7 million) in 2020,” Mammadov said.

“SOFAZ will continue investing in fixed-income financial instruments and short-term capital market instruments, stocks and real estate within its investment strategy for 2020,” Mammadov added.

“The basis of SOFAZ’s strategy is to diversify its investment portfolio by distributing financial flows into various types of assets to minimize the consequences of potential risks,”hge noted.

“Regardless of the type of assets, after analyzing the global macroeconomic situation, recent trends in the world markets and thoroughly examining potential opportunities and risks, SOFAZ’s investment strategy may be reviewed,” the executive director said.

“In connection with the plans for certain types of assets, I would like to note that the strategy for financial tools with fixed income and tools of the short-term capital market depends primarily on the macro environment, as well as the monetary policy of a particular country and the yield on the corporate bond market,” Mammadov said.

“SOFAZ increased the share of government bonds in the investment portfolio in 2019, while the share of investments in the financial sector was reduced,” said Mammadov.

Mammadov added that the sensitivity of the portfolio to the changes in interest rates (effective duration) was also increased by investing in bonds with a higher weighted average term of the payment flow, which leads to an increase in yield during a period of a long fall in interest rates.

“These decisions have reduced the overall credit risk of the portfolio. As a result of this, the correlation of fixed income financial instruments with other types of assets was reduced, which contributed to further diversification of the investment portfolio," Mammadov said.

"Regarding investments in private equity shares and real estate, SOFAZ began investing in these assets in order to build a globally diversified portfolio, and in accordance with this, it is planned to continue investing in North America, Europe and the Asia-Pacific Region, through stock and joint investments,” executive director said.


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