Weekly actual topics in Azerbaijan (April 9-14)

Analysis Materials 16 April 2012 12:20 (UTC +04:00)

Bad loans in Azerbaijan: situation under control

The share of bad loans in a total volume of granted loans is 6.4 percent in Azerbaijan, reaching a maximum for the last five years. The increase in the share of bad loans is connected with the consequences of the global financial crisis. It is not a secret that big banks promoted the growth of this index. They did not stop lending in 2009-2010. A negative impact of the crisis on the psychological level contributed to the citizens' saving by reducing their costs. This affected their ability to serve the loans in a timely manner.

According to the Azerbaijani Central Bank, as of early February 2012 the country's banks issued the loans amounting to 10084.6 million manat. The loans worth 643.1 million manat (6.38 percent) of this amount were overdue. It should be stressed that according to the international standards, the share of bad loans (expiration by 90 days) in a total volume of loans at seven percent is considered a critical limit.

According to Fitch Ratings, the index of bad loans in the Azerbaijani banking system hit 14 percent in late 2011. The research is based on the data of eight banks rated by the agency, which account for 66 percent of the assets of the Azerbaijani banking sector.

The growth of bad loans has a negative pressure on the banks' capital adequacy and deteriorates asset quality. Bank experts very often speak about the threatening nature of overdue loans, contributing to the widening of this segment and the formation of deeper problems in the banks. Moreover, the seriousness of this threat is often underestimated. Most banks do not announce this. They work with clients, give them amnesty, reallocate the debt for the next period, conclude a new agreement, etc.

Fitch Ratings agency explains that besides the deficiencies in the operating sphere, weak credit allocation standards in banks often adversely affect the asset quality. The increased competition for borrowers in small and medium enterprises and for physical entities also carries the risk of using less stringent underwriting standards in this segment.

There were periods in the history of Azerbaijani independent banking system when overdue loans in a total volume of bank loans exceeded 20 percent. Thus, as of 2002, loan funds amounting to 518.6 million manat were invested in Azerbaijani economy. The volume of overdue loans of this amount totaled 109.62 million manat (21.14 percent of the total credit investments).

In 2003, the country's credit market significantly perked up. The widespread allocation of loans to physical entities to buy consumer goods led to a noticeable increase in short-term loans. These short term loans have made the main contribution to the growth of total credit investments. About 10.23 percent of funds fall to overdue investments. The figure was 5.5 percent in 2004. The lowest rate of overdue loans was fixed at 1.6 percent in June 2008.

Consequently, the bad loans for Azerbaijan are not insoluble problem. It is possible to significantly reduce them at a certain stage. So, the work with such loans is an individual work of each bank. The motivational system must be based on the quality of issued loans, rather than quantity. One of the domestic banks said that the main goal of bad risk management is the transformation of a bad client into satisfactory, rather than resolving the problem by a pledge. The credit must be pre-identified, tested and analyzed. The country's central bank controls the situation by introducing preventive measures for banks.

Number of countries interested in Azerbaijan investments increases

Azerbaijan is expanding its geographical scope of foreign investments. The proof is seen by the investment of millions in many countries, from Georgia, Belarus and the Ukraine to the country which is a candidate into the European Union - Serbia. Billions of dollars are being invested in neighbouring Turkey. It is known that the investments of SOCAR Azerbaijan (SOCAR) alone in the Turkish economy will reach $17 billion before the end of 2017.

In total, according to the Ministry of Economic Development of Azerbaijan, foreign investments of Azerbaijan reached $6 billion from 2003 - 2011. Priority of its foreign investment policy of the country in joint major energy and infrastructure projects in transport, agriculture and tourism.

Growing financial opportunities of the country and the associated active foreign investment expansion have an effect on the international image of Azerbaijan as a reliable partner. Azerbaijan received offers from several countries for economic cooperation more and more often, namely, investing in their economies. Both specific projects and areas of choice at its own discretion are proposed.

For example, Kyrgyzstan has requested as much as $1 billion of investment from Azerbaijan in projects, ranging from a refinery to banking, tourism and the creation of the Azerbaijan and Kyrgyz Investment Fund. The cost of building a refinery in the Kyrgyz Republic could reach nearly $200 million.

Official Minsk last year, invited Azerbaijan to participate in Belarusian privatisation and buy shares of two Belarusian refineries - Mozyr Oil Refinery and Oil Refinery Novopolotsk (Naftan).

Pakistan expects investments from Azerbaijan in its defence industry and Azerbaijani companies also received offers to invest in Pakistan's economy and create joint ventures.
The Chechen Republic of Russia has recently expressed interest in attracting major Azeri investors to develop the real economy sector in Chechnya.

"In Chechnya, there are number of oil fields where it is necessary to carry out exploration work. Chechnya could cooperate with Azerbaijan in this direction" deputy Prime Minister of Chechnya, Finance Minister Eli Isayev said.

Even faraway South America is waiting for Azeri investment. In October last year, Minister of Foreign Affairs, Trade and Integration of Ecuador Ricardo Patiño Arokan Armando said that Azerbaijan and Ecuador has great potential for trade, investment, joint energy projects, projects for the construction of ports, etc.

And it is not a complete list of countries that want to see Azerbaijani investment in their countries. If, until recently, the foreign investment of the Azeri government focused mainly on the development of the oil sector, to be exact - the projects of the State Oil Company of Azerbaijan Republic, then today companies of the non-oil sector are also increasingly receiving orders outside of the country.

At present, Azerbaijani businessmen are actively involved in major projects implemented in Russia in preparation for the Winter Olympic Games to be held in two years in Sochi. Concrete work and evaluation of these two countries in the high-tech and knowledge intensive areas is underway.

"Azerbaijani investors are interested in growing and processing of grain, fruits and vegetables and moving into the field of tourism and wood processing," sales representative of Russia in Azerbaijan Yuri Shchedrin says.

For example, a tea packing factory was built and commissioned, the construction of fruit and vegetable cannery is nearing completion through Azərsun Holding in the Belorechensk district of the Krasnodar region. The Mətanət-A company will begin to build a plant for the production of dry contaminants in the Otradnoe district of Krasnodar region in the near future.

An active presence in foreign markets policy implemented by the Azerbaijani government in future by investing, not only affects the results for a higher dividend, but also strengthens Azerbaijan's political influence in the world.

World builds new nuclear power plants

Despite the fact that relating to the accident at the Japanese Fukushima nuclear power plant seriously undermined people's confidence in nuclear power up to the point of abandoning functioning nuclear projects, some countries on the contrary, want to build their own nuclear power plants.

According to the World Nuclear Association, of those contemplating to begin construction in the next five years, 29 countries of the world plan to begin construction in the next five years of 154 nuclear power blocks, but in the long term (construction will begin in the next 15 years), 36 countries want to increase this number to 342.

Among these countries is Turkey which is resolved to building a number of nuclear power plants. Thus, Minister of Energy and Natural Resources Taner Yildiz said Turkey is in talks to build nuclear power plants with the three countries on three different models. Turkey has already signed an agreement with China, South Korea and Russia on the peaceful use of nuclear energy. The first Turkish nuclear power plant will be built on the Akkuyu site.

This means that Turkey will be the second country in the Middle East to have a nuclear power plant. Today, the Iranian Bushehr nuclear power plant is the one in Iran and throughout the Middle East. It will operate at full capacity (1,000 MW) in the early summer of this year and will produce from 720 to 730 megawatt hour which is 75 per cent of the final potential of the station.

Of the former Soviet Union countries, Belarus, Kazakhstan, Lithuania have plans to build nuclear power plants, while Ukraine and Russia, which already have 15 and 33 nuclear power plants, respectively, wish to increase their number.

The only justification that the number of nuclear power plants in the world is growing, even in view of their potential danger, is the ever growing demand for electricity, the demand for which is growing year by year. And nuclear power plants currently are among the main suppliers of cheap electricity for industry and domestic consumption.

The operational principle of nuclear power stations is very simple - this is a common conversion of thermal energy into electrical energy, but at the same time nuclear power is a global security threat to humans and the environment.

At present, many scholars hardly question the relevance of the use of atomic energy. Today the third generation of reactors is being built, even in earthquake zones and yet there is wariness about the nuances of the individual stations under specific conditions.

For example, Metsamor NPP in Armenia which does not meet modern standards in Armenia, built in 1976, is located in a seismically active zone. That's why it becomes a source of threat to the region. This was repeatedly stated by Azerbaijan and Turkey. Turkey is going to address the IAEA with the proposal to close the Armenian nuclear power plant motivating it by security reasons. The Turkish side is planning to initiate the closure of all stations with an expired use.

The international community led by the U.S. and the EU also exerts a significant pressure on the Armenian government to withdraw the existing nuclear power plant in Metsamor from operation. Mankind has survived major accidents after which some areas of the earth have become unfit to live. According to official data in Belarus, the most affected by the Chernobyl disaster was in neighbouring Ukraine, where more than 2.5 per cent of the population are registered for cancer, but Armenia is in no hurry to abandon its nuclear power plants.

Once again the excuse is that at this point in the world there is no alternative to nuclear power plants since nuclear energy is a highly efficient form of electricity generation and alternative schemes are too expensive and have very high overhead costs, including environmental ones. Early decline in demand for electricity is also not expected; hence the interest in nuclear power in the world is will not soon fade.