Azerbaijan’s reserves replenished by new currencies

Analysis Materials 4 October 2012 12:51 (UTC +04:00)
The issue of diversifying Azerbaijan’s foreign exchange reserves becomes more urgent with their growth
Azerbaijan’s reserves replenished by new currencies

Azerbaijan, Baku, Oct. 4 / Trend /

Ellada Khankishiyeva, Trend Analytical Centre Head

The issue of diversifying Azerbaijan's foreign exchange reserves becomes more urgent with their growth. Moreover, taking into account that the rates of the main reserve currencies - the dollar and the euro have recently been rather volatile, the measures of diversifying the foreign exchange reserves are necessary. The rates did not only show steady growth, but declined.

As of the end of the first half of 2012, Azerbaijan's strategic currency reserves formed mostly from the assets of the State Oil Fund of Azerbaijan (SOFAZ) and reserves of the Central Bank (CB) exceeded $ 44 billion.

The Azerbaijani Central Bank's international assets in foreign currencies are concentrated mainly in U.S. dollars and the Euro (60 and 35 per cent, respectively). No changes in the currency are expected until late 2012.

However SOFAZ's currency structure which consists of the U.S. dollar, euro and pound sterling, Turkish lira and Australian dollars, expects replenishment this year. The Russian rouble will play a role as reserve currency in Azerbaijan. The Canadian dollar and Japanese yen are further contenders for this role.

SOFAZ's investment portfolio will consist of the currencies of other countries having a long term rating of no less than 'A' (Standard and Poor's, Fitch Ratings) and 'A2' (Moody `s). However, it should be stressed that only five per cent of the investment portfolio will fall to these currencies, while the dominant 50 per cent will consist of U.S. dollars, 40 per cent - euros and five per cent the British pound sterling.

As one can see, the foreign exchange reserves are distributed for the convertible currencies of different countries to be included therein. At present, they are the most stable. For example, the Australian dollar is a 'commodity currency', i.e. tied to commodity prices and becomes stronger because of continued high prices on oil and ferrous metals. As the price on raw materials in the long term prospect continues to increase, it is reasonable to expect a strengthening of this currency. The same can be applied to the Canadian dollar.

At the same time, the diversification of reserves does not include the release of foreign exchange reserves from the dollar equivalent. The U.S dollar plays a key role in all components in Azerbaijan, where the currency composition of reserves is determined on the basis of the currency structure of foreign trade, external public debt and the currency of monetary policy.

However, while diluting dollar assets by the currencies of other countries, whether it is the Russian rouble or Turkish lira, Azerbaijan will facilitate the task of settling with those countries it has close trade and economic relations. Thus, Russia, and Turkey are the leaders in Azerbaijani foreign trade turnover. In particular, in January-July this year, Azerbaijan mainly imported 15.8 per cent from Turkey. Russia ranked second on the same index at 14.22 per cent. Direct settlements in national currencies will ensure convenience and will not allow losses on exchange rate differences.

Therefore, Azerbaijan should gradually diversify its reserves by increasing the portfolio by other currencies. At the same time one must recognise that it is difficult to maintain a rather diverse composition of reserves because the market capacity is small in many non-main currencies and this limits the opportunity to invest reserves in instruments denominated in these currencies. As opposed to them, even in spite of the volatility in the markets, the U.S. dollar does not have such a currency in terms of liquidity in the market and other trading facilitating parameters.

Besides the assets in monetary equivalent, Azerbaijan increased its reserves in gold and invests in stocks, as well as real estate. One can protect against the risk of currency depreciation this way.