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Review of monetary sector in Azerbaijan (January-May 2011)

Analysis Materials 18 July 2011 16:47

Upon the decision of the Central Bank of Azerbaijan (CBA), the interest rate will be increased by 0.25 percent to 5.25 percent from May 6, 2011.

The Central Bank also decided to increase the compulsory reserve requirements on domestic and foreign liabilities of banks from two to three percent

These decisions have been made as part of targeted measures of the CBA to preserve the price and financial stability in the country.

"Increase in food and energy prices has been observed in world markets over recent months. At the same time, there is a significant difference between countries and regions in the dynamics of economic growth and indicators of financial stability. In these circumstances, the flow of capital strengthens in the countries with sustained growth," said CBA.

In the current global economic situation, the growth in the economy of Azerbaijan continues, the rate of economic activity and production capacity increases. An increase is recorded in sources of monetary growth, the amount of surplus in balance of payments and foreign exchange reserves in the country.

"In these conditions, it is important to keep control over inflationary factors," said the CBA.

The decision to increase the interest rate is also aimed at strengthening the capacity of the Central Bank for the sterilization of excess money supply by providing appropriate conditions in financial markets.

Currency market and manat rate

The Central Bank of Azerbaijan (CBA) plans a transition to a more flexible monetary management system in the next 10 years.

The draft long term strategy of economic development of Azerbaijan for 2011-2025, developed by the Ministry of Economic Development, includes plans on transition to a free floating rate of national currency within a flexible rate policy.

The CBA is controlling the rate of national currency to avoid extra consolidation of manat rate. There is increase in supply of dollar on the domestic market, which led to deepening the manat rate, whilst the CBA keep the situation under and prevents extra increase in manat rate, as it was last year.

Consolidation of manat rate might impede development of the country's non-oil export, but it is positive factor in term of inflation, because increase in currency rate means decrease in price of import.

The key task for the CBA now is to maintain inflation in stable one-digit level, which is forecasted in the long-term prospect. The government targets maintaining the inflation on the lower level and prevent sharp change in the rate of national currency both its rise and drop.

The Azerbaijani currency market records a balance, as proposal slightly exceeds demand while manat strengthens by about 1 percent. The situation with the strengthening of manat will depend on the payments balance, but in any case, the CBA will not allow the strong strengthening. Thus, if a surplus of the payments balance was at $ 15 billion in 2010, the minimum forecast is $13-$14 billion in 2011. But, the figure may exceed $15 billion

On results of trades in currency section on tool USD/AZN_TOD Baku Interbank Currency Exchange (Baki Banklararasi Valyuta Birjasi - BBVB) defined five banks - leading operators of exchange market of hard currency in May 2011, the BBVB reported.

Azerbaijan Industry Bank headed five bank-leaders of exchange currency market in accordance with shares of transactions concluded by him.

Without deals of the Central Bank of Azerbaijan, 37.46 percent of the currency turnover fell on ASB in May 2011. Xalq Bank (18.72 percent), Unibank (14.51 percent), International Bank of Azerbaijan (10.3 percent), and AGBank (6.37 percent) also included in the number of the leading dealers of organized currency market.

In total 10 banks have taken part in the trades of currency section of the BBVB in May 2011. In accounting month in "Bourse E-System of Trades" (BEST) 40 trading sessions are conducted and 33 transactions are registered. The total volume of trades of currency section in accounting month on USD/AZN has made 42.192 million manat or 53.407 million in dollar equivalent.

In comparison with indicators of May in accounting month the total volume of trades in currency section has decreased by 82.216 million manat or 3 times. The average daily turnover in "Bourse E-System of Trades" on USD/AZN reached approximately $1.335 million, then that the average volume of each transaction has made up $1.618 million.

It is necessary to note, that exchange rate of national currency on tool USD/AZN_TOD in accounting month has increased on 0.11 percent from 0.79 to 0.7891 for 1 USD. Thus the US dollar average rate in consideration to manat has made in May 0.79 manat for 1 USD, against 0.7907 AZN following the April results of current year.

Monetary market

The CBA has always focused on the real effective exchange rate, which is defined by two parameters - the inflation in Azerbaijan and inflation in the countries - trade partners. The Central Bank aims to maintain inflation in the country at least at the level of those countries.

A normal macroeconomic framework, to which we go, is the ratio of broad money (M2) to inflation in the same interval as in 2010. Money supply growth is expected to reach 30-35 percent, and forecast of the average annual inflation rate ranges between 7 - 8 percent.

So, as of June 1, 2011, the rate of M2 (cash in circulation (outside banks) and and remainders in the domestic currency on accounts of non-financial organizations, financial (excluding credit) organizations and phyiscal entities).was 8.392 billion manat compared to 8.176.4 billion manat as of early May and 6.454 billion manat as of June 1, 2010.

The amount of cash money supply (M0) as of June 1, 2011 hit 5.610.3 billion manat compared to 5.457.8 billion manat as of early May and 4.543.3 billion manat as of June 1, 2010.

As of early June, Broad Money Supply (M3) totaled 11.056.1 billion manat compared to 10.760.6 billion manat in early May and 8.929.8 billion manat as of June 1, 2010.

The transaction money (M1) amounted to 6.833.6 billion manat as of June 1 compared to 6.660.4 billion manat as of early May and 5.439.8 billion manat as of June 1, 2010.

Parameters of monetary market, in bln manat

Amount, January to May, 2011

Money mass in extensive understating (М3)

11.056.1

Money mass on manat (М2)

8.392.0

Cash in manat (М0)

5.610.3

As of June 1, 2011, money base in Azerbaijan amounted to 6.294.4 billion manat. As of May 1 money base in the country made up 6.191.6 billion manat, as of Jan. 1 - 6.520.9 billion manat and as of June 1, 2010 - 5.048 billion manat.

As of June 1, 2011, money base in manat made up 6.244.9 billion manay compared to 6.167.3 billion manat as of May 1, 6.397.1 billion manat as of Jan. 1 and 5.012.6 billion manat as of June 1, 2010.

Money in circulation made up 5.949.5 billion manat in this period, whereas the figure was 5.769.5 billion manat as of May 1, 5.793.2 billion manat as of January 1, and 4.803.5 billion manat as of May 1, 2010.

In turn, bank reserves constituted 337.1 million manat (414.3 million, 725.5 million manat and 235.3 million manat respectively).

Cash money mass in circulation with regard to money base was 94.52 percent in this period compared to 93.18 percent as of end April, 88.84 percent as of beginning of the year and 95.16 percent as of end May 2010.

In mln manat

01.06.2010

01.06.2011

1.

Reserve money

5048,0

6294,4

2.

Reserve money in manat

5012,6

6244,9

3.

Money in circulation

4803,5

5949,5

4.

Bank reserves

235,3

337,1

Credit market

As of 2011, the CBA expects inxrase deending on the demand of economy, and credi activity of the country's banking sector.

After the global financial crisis the banks are conducting conservative policy from the aspect of risks, accumulate excess liquidity and are more careful in the credit policy.

There is big difference between growth rate of loans and deposits, while the plans on diversifying banks' funds willmore probably change, they will send a considerable part of their liquid funds to crediting real sector, which will be carried out gradually.

Special weight of overdue credit is expected at 4-6 percent in 2011 like last year, whereas there will be no increase in problematic loan.

As of June 1, the banks provided loans totaling 8.750.4 billion manat compared to 8.639.6 billion manat as of May 1 and 8.733.5 billion manat as of June 1, 2010.

Of the total portfolio, loans worth 551.8 million manat were overdue compared to 553.2 million manat as of May 1, about 383.6 million manat as of June 1, 2010. Statistics of overdue loans does not include similar loans of non-bank credit institution Aqrarkredit.

As of June 1 the average rate on bank lending of Azerbaijani economy in national currency amounted to 16.50 percent compared to 16.54 percent as of May 1, 15.88 percent as of June 1, 2010.

The average rate on bank lending in hard currency was 16.48 percent compared to 16.55 percent and 17.12 percent respectively.

As of early June the average rate on bank lending of legal entities in national currency amounted to 14.47 percent compared to 14.61 percent compared to May 1, 2011, 14.14 percent compared to June 1, 2010. The average rate on bank lending of corporate clients in hard currency was 13.44 percent compared to 13.24 percent as of May 1 2011, 14.69 percent compared to June 1, 2010.

During the reporting period, the average rate on bank lending of physical entities in national currency amounted to 19.86 percent compared to 19.76 percent as of May 1, 2011 and 20.10 percent compared to June 1, 2010. The average rate on bank lending of individual clients in hard currency was 23.77 percent compared to 23.90 percent and 23.09 percent respectively.

Banking sector

The Central Bank of Azerbaijan (CBA) has introduced a "leverage" standard.

The bank has decided to apply the new leverage regulations of eight percent in late 2010. Banks will have to comply with the ratio of the balanced capital to assets plus off-balance assets.

The norm, he said, will limit strong bank growth.

This is a very effective tool in terms of containing the growth of banks that are not secured by sufficient capital. A similar practice was used earlier in Azerbaijan's banking sector with a coefficient of six percent, but was suspended in 2003.

The CBA re-introduced a standard of "leverage" in 2011, but in a more rigid form, as off-balance assets in addition to balance assets have been included in the procedure of calculation, and the demand increased from six to eight percent.

The main purpose of introducing the standard is to provide capital management, liquidity and credit risks at a safe level. It will give an additional impetus to capitalization of banks .

Based on the CBA data, as of June 1, total sum of bank deposits and deposits by legal and physical entities hit 5.729.3 billion manat compared to 5.585.4 billion manat as early May and 5.448.8 billion manat as of early 2011.

The deposits of physical entities totaled 3.321.5 billion manat as of early June compared to 3.358.7 billion manat as of May 1 and 3.029.8 billion manat as of Jan.1, 2011.

The deposits of legal entities totaled 2.407.9 billion manat compared to 2.226.7 billion manat in early May and 2.419 billion manat, accordingly.

The average rate on deposits in manat as of June 1 amounted to 10.98 percent compared to 10.96 percent as of May 1, 2011, 11.20 percent - June 1, 2010.

The average rate on deposits in foreign currency amounted to 11.35 percent compared to 11.20 percent and 10.87 percent respectively.

As of June 1, the average rate on deposits of individuals in manat was 11.66 percent compared to 11.66 percent as of May 1, 2011, 12.91 percent - as of June 1, 2010. The average rate on individuals' deposits in foreign currencies amounted to 11.50 percent compared to 11.29 percent and 12.65 percent respectively.

As of June 1, the average rate of corporate deposits in manat was 6.24 percent compared to 6.35 percent as of May 1, 2011 and 5.40 percent as of June 1, 2010. The average rate on deposits of corporate customers in foreign currencies amounted to 7.88 percent compared to 9.03 percent and 5.97 percent respectively.

Stock market

Azerbaijan will develop its securities market in six directions within the State Program "Development of the securities market of the Azerbaijan Republic for 2011-2020" recently approved by the President.

The securities market in Azerbaijan will be developed in six directions in 2011-2020 under the state program.

An action plan includes institutional development of securities market; organization and promotion of collective investment schemes and financial intermediation; support to the supply and demand in the securities market; expansion of the use of corporate governance and principles of financial transparency; improving the legal framework in this area; expansion of awareness and training of professional personnel. The official press published the text of the state program and the plan on Tuesday.

Regarding the first direction, it is expected to bring the institutional and legal structure of the stock exchange to international standards, as well as to introduce new trading system that will expand trade opportunities and basic subsidiaries of financial instruments. Mechanisms accounting of securities and registration of rights to them will be simplified during 2011-2013. The country will create a single, centralized depository system for government and corporate securities in 2012-2014.

The State Securities Committee (SSC) jointly with the Central Bank of Azerbaijan (CBA) will carry out measures to automate and optimize procedures for pledging securities in 2012-2014, and an integration of operational and settlement systems of the OTC organized securities market in the clearing system will be ensured in 2013-2016.

The action plan also envisages the organization and promotion of collective investment schemes and financial intermediation, in the frames of which the necessary legal framework will be developed in 2012-2013 governing the activities of investment companies and further their activities and the legal framework in 2011-2013 governing and promoting the activities of asset management companies and investment funds and other collective investment schemes, as well as the activity of custodians in 2012-2014.

The Finance Ministry, CBA and SSC will together work on the formation of predictable, stable primary and a liquid secondary market for the government bonds in 2011-2013. The SSC will adopt measures to promote the activities of the market-maker institutions and create a regulatory legal framework of their activities in 2013-2015.

The SCS in cooperation with the Economic Development Ministry will create an alternative stock exchange trading platform for small and medium entrepreneurs in 2012-2014.

The Finance Ministry tasked to implement measures until 2015 to develop expertise on the financial statements of private and public enterprises and ensure application of the international and national financial reporting standards. In 2016-2018, the committee will take measures aimed at forming the legal framework governing the activities of rating agencies, and promote their activities.

Until 2013, the country is expected to adopt a new law "On securities market" corresponding to international best practice. It is planned to create an optimal system of registration and registration of securities and implementation of international numbering securities (code ISIN) in 2013.

The total turnover of transactions on all instruments at Baku Stock Exchange (BSE) for January- May 2011 totaled 3.214 billion manat, increasing by 4.35 times compared to the same period of last year, a statement said.

The corporate securities market increased by 1.87 times compared to the same period of last year. It hit 2 .67 .56 million manat. This is stipulated by the increased volume of transactions in corporate bonds by 2. 46 times.

The state securities market increased by 4.94 times up to 2.95 billion manat. This happened as a result of the sharp increase of operations by 5.09 times.

Comparative table on the results of trades of Corporate Securities at BSE (January-May 2011)

Market segments

Volume of transactions,

January-May, 2011, AZN

Volume of transactions,

January-May, 2010, AZ N

Percentage ratio

Corporate bonds- (placement)

64 .046 .585.00

46 .190 .263.14

138.66

Corporate bonds - (secondary market)

146 .959 .040.39

39 .572 .036.11

371.37

CBs Total

211 .005 .625.39

85 .762 .299.25

246.04

Stocks - (placement)

52 .349 .232.00

53 .854 .300.00

97.2

Stocks -

(secondary market)

4 .208 .516.14

3 .114 .853.00

135.11

Stocks Total

56 .557 .748.14

56 .969 .153.00

99.28

CS Market Total

267 .563 .373.53

142 .731 .452.25

187.46

Comparative table on the results of trades of Government Securities at BSE (January-May 2011)

Market segments

Volume of transactions, January-May 2011,AZN

Volume of transactions, January-May 2010, AZN

Percentage ratio

GB - (AR MF) (placement)

140 .552 .321.75

108 .314 .128.48

129.76

GB - (AR MF) (secondary market)

14 .222 .417.18

63 .639 .630.42

22.35

GB Total

154 .774 .738.93

171 .953 .758.90

90.01

Notes (AR CB) - (placement)

396 .340 .896.29

78 .539 .020.96

504.64

Notes (AR CB) - (secondary market)

3 .556 .081.09

0.00

-

Notes Total

399 .896 .977.38

78 .539 .020.96

509.17

Repo operations

2 .391 .687 .193.30

346 .003 .043.77

691.23

GS Market Total

2 .946 .358 .909.61

596 .495 .823.63

493.94

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