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Double consequences of euro decrease for Azerbaijan

Analysis Materials 12 January 2012 17:44 (UTC +04:00)
The European debt crisis is in full swing.
Double consequences of euro decrease for Azerbaijan

Azerbaijan, Baku, Jan. 11 / Trend /

Ellada Khankishiyeva, Trend Analytical Centre Head

The European debt crisis is in full swing. It affects the course of a single European currency. The euro rate compared to the U.S. dollar dropped from $ 1.2778 to $1.2738 per euro on Jan. 11 after trading the day before. According to the auction, the euro rate declines compared to the dollar amid the expectations for data on Germany's GDP for 2011 and the placement of debt securities by Italy and Spain this week.

However, despite the decline the European currency remains significantly higher than the dollar.

The unstable position of the euro has a double meaning for Azerbaijan. On the one hand, it is known that about 30 percent of the country's total imports fall to the goods from the eurozone. The goods imported from the euro zone have mainly the investment destination. Therefore, first, the cheapening of euro leads to a drop in prices for industrial equipment. This can keep inflation in the country at the one level.

On the other hand, the depreciation of the euro has undesirable impact on the production of Azerbaijani companies exporting their goods to Europe. The exchange rate of manat compared to the euro leads to the rise in the price on goods of these companies. It reduces the competitiveness of exported products in the markets of the Eurozone. One thing reassures that there are few products. Oil and oil products are sold in dollars.

The euro rate compared to manat has reduced by 1.6 percent since early 2012 (from 1.0178 manat to 1.0019 manat per euro as of January 11, 2012). It should be noted that the Azerbaijani Central Bank (CBA) completely abandons the use of dual currency (dollar / euro) basket while determining the exchange rate of manat. It has passed to bilateral (manat / dollar) exchange rate targeting since January 10, 2011.

The depreciation of the euro rate has a negative impact on the cost of Azerbaijan's strategic currency reserves. It is known that the CBA balanced the currency composition of the portfolio in 2008. At present, about 60 per cent of foreign currency reserves are in dollars, while the remaining 40 per cent in the euro and the pound / sterling. About 40 percent of the investment portfolio of the State Oil Fund of Azerbaijan is also concentrated in the euro.

But the factor that the Azerbaijani currency reserves are well diversified both in monetary and geographical structure, the threat of instability of euro currency does not pose a risk for the country. It should be noted that Azerbaijan did not observe any loss on this front even in the worst crisis period.

The decrease in euro has another minus for Azerbaijan. This is the suspension of the process of the debut issue of Eurobonds by the government till the situation on world markets is stabilized, that is for the indefinite period. Previously, these plans were delayed because of the global financial crisis. However, it should be noted that Azerbaijan was preparing to issue sovereign Eurobonds. The first issue of Eurobonds for the Azerbaijani government is more connected with the growth of the country's image and the access to European markets, rather than the need to borrow funds this way.

The analysts predict further fall of euro. The euro may fall to at least $ 1.20 for the next three months. The decline in the euro is quite reasonable, as the debt crisis in the eurozone is still acute.

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