BAKU, Azerbaijan, March 27
By Eldar Janashvili - Trend:
The policy pursued by Azerbaijan to minimize the spread of the virus seems adequate, Dmitry Pankin, President of the Black Sea Trade and Development Bank (BSTDB), told Trend.
“Most of the recent negative macroeconomic developments are directly caused by this virus. So, the outbreak of COVID-19 led to a drop in oil demand, closing borders, restricting movement, etc. Therefore, the response to the current situation should mainly concern the problems associated with the virus, and most countries of the world are looking for ways to solve them. Thus, the response to the current crisis is in fact an ongoing process for all countries,” Pankin noted.
“In case of Azerbaijan, there is at least double hit/blow. So, there is direct impact of the virus and another is fall in crude oil prices. Direct economic impact of virus spread on Azerbaijan has been on tourism sectors and associated supportive industries like transport, restaurants, cafes, etc. The sad thing is that it coincided with Novruz holiday when Azerbaijan attracts thousands of tourists from Iran. Beyond that, Azerbaijan cancelled all festivities domestically also. These were necessary measures to minimize human cost of the spread of the virus. Azerbaijan also stopped flights from risky countries, established quarantine centers to host Azerbaijani citizens returning from risk group of countries. Overall, policies implemented to minimize the spread of the virus seem to be adequate. And, as I mentioned, response to the virus spread is the “work in progress” and Azerbaijan seems to be doing well in that regard," he said.
“However, Azerbaijan should also address the issue of fall in oil prices. On March 18, 2020 price of Brent oil dropped below $26 per barrel. This is far below budgeted price of $55 per barrel. Following the shock of 2014 oil price drop Azerbaijan along with several other energy producing countries followed conservative policy which improved its resilience by building buffers in the form of FX reserves. Currently reserves of Azerbaijan (SOFAZ+Central Bank) are around 100 percent of GDP and this is among the highest in the world. Azerbaijan’s minister of finance has stated that the country's state budget is not under the risk even if the price drops to $30 per barrel. With the available reserves and experience from the past Azerbaijan can really handle the current oil price drop," said the BSTDB president.
“However, political decisions should be developed and made transparently available to the public, because in the absence of an information flow, part of the population flees to banks, puts pressure on them. Despite the fact that the COVID-19 epidemic is likely to be eradicated in a couple of quarters, Azerbaijan, like any other country, should be prepared for the fact that it can last for a longer period,” Pankin said.
“Over the past five years, the world has experienced two major oil price shocks. And in each of these cases, countries with fixed or quasi-fixed exchange rates had more problems than countries with flexible exchange rates. Thus, the only thing that needs to be done is to switch to a full-fledged floating exchange rate. Take, for example, Russia. Russia is also facing serious problems due to falling oil prices. However, all analysts agree that the floating ruble will minimize the negative impact of falling oil prices, helping to quickly adapt to the situation. It is also necessary to include a clear policy for commercial banks with reliable confidence-building support measures."
“Azerbaijan has repeatedly stated that diversification of the economy away from oil and gas sector is of paramount importance. And over the last five years with two oil price shocks we see how it is important. It is probably very right time to take decisive steps right now in that direction. Within this broad setting, exchange rate policy and strengthening of the banking sector is a must if we don’t want to face similar situation again in the future oil price shocks. Add to that clear communication of fiscal policy with commitment to the fiscal rule to feed confidence. Furthermore, there is a possibility of transfer of some focal points in supply chains from China and others to other countries. Faced with the crisis, some companies had problems in procuring either final or intermediary goods that were produced in China. This will likely push some global companies to diversify their supply chains by investing in new countries. This factors makes improvement of the investment climate in Azerbaijan even more urgent and definitely will have positive impact on trade,” the bank president said.
“Regarding the fate of tourism and transport, it is highly likely that once virus threat is over we will be back to usual in these sectors. Important thing would be to avoid defaults in the sector and work further on making tourism attractions better. We have seen that in some countries commercial banks have already delayed loan repayments in the companies in the sector along with some supportive incentives from the governments. Combination of budget support along with collaboration from the commercial banks can help companies in tourism sector survive the current round of challenges and start adding value once virus related measures are removed,” Pankin concluded.