Review of monetary sector in Azerbaijan (jan.-sept. 2012)

The ratio of Azerbaijan's strategic currency reserves to GDP is close to 70 percent, the Azerbaijani Central Bank's report on monetary policy in January-September 2012 said.

The strategic currency reserves of the country increased by 11 percent in January-September compared to early 2012 and exceeded $ 45 billion. This is enough to cover imports of goods and services for three years.

"The high growth rates of strategic currency reserves are a factor reducing the sensitivity of the country's economy to external crisis influences and forming a strong macroeconomic buffer," the report says.

Foreign exchange reserves held by the Azerbaijani Central Bank increased by 10 percent and reached $ 11.5 billion during the period. This is enough to finance imports of goods and services during a year.

"Despite the downward trend in the world market oil prices, there was a positive dynamics in the country's external position due to the high oil price in the first nine months of 2012," the report said. "Achieving the average price on Azerbaijani oil worth $ 114 had a positive impact on the country's foreign exchange earnings."

According to the report, besides the export, the dynamics of money transfer and capital flows from abroad enhanced the foreign exchange earnings.

According to the preliminary data, the volume of money transfer exceeded $1 billion.

Currency market and manat rate

The stability of the exchange rate is an important factor of macroeconomic stability. The stability of manat has been preserved for the last nine months, despite the country's balance of payments surplus and excess supply of foreign currency over demand. The CBA has sterilized currency to the amount of $978 million for the first nine months of this year to keep the balance. As a result, the manat strengthened compared to the dollar by only 0.17 percent.

During the reporting period manat has not been strengthened compared to any currency.

Manat cheapened in nominal and real terms compared to the currencies of Great Britain, Turkey, Georgia, China, Belarus and South Korea.

But it rose in price nominally, but cheapened really compared to the currencies of the U.S., the Eurozone, Russia, Ukraine, Iran, Kazakhstan, Japan, and Israel.

In January-September, the nominal effective exchange rate of manat on non-oil sector in total trade turnover rose by 0.7 percent. Inflation in the partner countries contributed to a decrease in the real effective exchange rate by 5.9 percentage points. The real effective exchange rate on the non-oil sector fell by 5.2 percent.

Thus, during the reporting period the Central Bank has ensured a stable bilateral exchange rate of manat and dollar. Multilateral manat rate cheapened. This is a positive factor in improving the competitiveness of non-oil sector.

In particular, the rate of the manat compared to the U.S. dollar strengthened by 4 points in the third quarter of 2012. U.S. dollar exchange rate in this period with some fluctuations fell after each round of quantitative easing of the U.S. Federal Reserve. Thus, the U.S. dollar dropped from 0.7856 manat per dollar since the beginning of the quarter to 0.7852 manat per dollar by the end of the quarter. Fluctuations between the maximum and minimum values for the period totaled 6 points.

The euro rate in Azerbaijan showed a sharp drop in the third quarter and the gradual growth due to good news from the Eurozone. Thus, the euro exchange rate increased from 0.9888 manat per euro from the beginning of the third quarter to 1.0155 manat per euro by the end of the month. The minimum rate is 0,9487 EUR / AZN was recorded on July 25, the maximum rate - 1,0310 EUR / AZN on September 17. Fluctuations between the maximum and minimum values ​​for the third quarter amounted to 823 points.

The forecast of the average annual rate of national currency compared to the U.S. dollar remains unchanged - at 0.79 manat until 2015 as in 2011. As one can see, the government preserves stability with respect to the forecast of the dollar rate and predicts gradual strengthening the manat compared to the euro.

According to the forecasts of the Azerbaijani government, the rate of the manat compared to the euro in 2012 is expected to hit 1.0910 manat per one euro compared to 1.0939 manat expected in 2011 (according to the CBA, the exchange rate was 1.0178 manat as of the end of the year). The rate for 2013 is projected at 1.0608 manat, in 2014 - 1.0430 manat and 2015 - 1.0387 manat.

Monetary market of Azerbaijan

The CBA's important task is to govern the money supply at an adequate level of macroeconomic and financial stability in terms of a continuous growth of foreign exchange reserves and high liquidity of the banking system.

The Azerbaijani Central Bank stressed an increase in all units of the money supply as of eight months of 2012 compared to a similar period of last year and all parameters compared to early 2012. This is a result of the influence of two factors: the increase in the quantity of money in circulation and the rate of their turnover.

The Central Bank of Azerbaijan (CBA) noted the increase in money supply (M2) (cash in circulation (outside banks) and remainders in the domestic currency on accounts of non-financial organizations, financial (excluding credit) organizations and physical entities) by 28.8 percent compared to Jan.-Sept. 2011.

So, as of Oct. 1, 2012, the rate of M2 was 12.402 billion manat compared to 9.630 billion manat as of Oct. 1, 2011 and 10.997.2 billion manat as of early 2012.

The amount of cash money supply (M0) as of Oct. 1, 2012 hit 8.315.4 billion manat compared to 6.465.9 billion manat as of Oct. 1, 2012 and 7.158.2 billion manat as of Jan.1, 2012

As of Oct. 1, 2012, Broad Money Supply (M3) totaled 15.343 billion manat or 21.3 percent more than in the same period of 2011. As of early Oct. 2011, this index hit 12.652.2 billion manat and 13.903.2 billion manat as of early 2012.

The transaction money (M1) amounted to 10.053.6 billion manat as of Oct. 1, 2012 compared to 7.809.7 billion manat as of early Oct. 2011 and 8.824.8 billion manat as of early 2012.

During the reporting period, non-cash money supply grew by 4.2 percent. This testifies to the effectiveness of the work to improve the non-cash payments in the country

Parameters of monetary market, in mln manat

The monetary base in Azerbaijan in 2012 returned to the phenomenal growth of the last year. In September, it rose by 2.46 percent compared to August.

According to the Azerbaijani Central Bank, as of October 1, 2012, the monetary base amounted to 9.299.8 billion manat (absolute record) compared to 9.076.3 billion manat as of Sept. 1, 8.275.4 billion manat as of January 1, 2012 and 7.206.5 billion manat as of Oct. 1, 2011.

As of the third quarter of 2012, the expanded monetary base in Azerbaijan totaled 9.399.7 billion manat. According to the CBA, the monetary base increased by 29.09 percent per annum and by 7.66 percent in the third quarter. As of October 1, 2011, the rate was 7.281.5 billion manat, as of the beginning of the third quarter - 8.730.4 billion manat, as of January 1, 2012 - 8.489.4 billion manat.

As of the reporting period, the volume of money in circulation was 8.793.7 billion manat, while as of October 1, 2011 the rate was 6.818.6 billion manat, as of the beginning of the third quarter - 8.183.9 billion manat, as of January 1, 2012 - 7.658.5 billion manat.

The bank reserves were equal to 589.9 million manat, which is 30.74 percent more than as of October 1, 2011 (451.2 million manat) or 11.76 percent more than at the beginning of the third quarter (527.8 million manat) and 28.6 percent less than the index as of early 2012 (826.4 million manat).

The ratio of the mass of cash in circulation to the money base amounted to 93.6 percent during the reporting period compared to the same figure as of Oct. 1, 2011, 93.7 percent - as of early third quarter and 90.2 percent as of Jan.1, 2012.

Credit market of Azerbaijan

Azerbaijani banks increased lending to the Azerbaijani economy by 5.96 percent during the third quarter of 2012 and by 18.75 percent compared to the same period of 2011.

According to the CBA, the banks delivered loans totaling 11.480.8 billion manat as of early October, 2012 (including 7.741.4 billion manat in national currency (67.4 percent) and 3.739.5 billion manat in freely convertible currency) 32.6 percent.

As of early third quarter of 2012, the figure was 10.834.8 billion manat (7.174.3 billion manat in national currency and 3.660.5 billion manat - in freely convertible currency), and as of Oct. 1, 2011 - 9.667.7 billion manat (6.019.7 billion manat and 3.648.0 billion manat in freely convertible currency).

Of the total portfolio, loans worth 757.9 million manat (6.6 percent) were overdue compared to 706.7 million manat as of early third quarter of 2012, about 620.2 million manat as of Oct.1, 2011. Statistics of overdue loans does not include similar loans of non-bank credit institution Aqrarkredit. The overdue loans increased by 7.2 percent for the third quarter of 2012, while by 22.2 percent per annum.

Short-term loans as of Oct. 1, 2012 amounted to 3.252.7 billion manat (including overdue loans worth 412.7 million manat) compared to 3.029.9 billion manat (including overdue loans worth 377.2 million manat) as of early third quarter of 2012, about 3.144.6 billion manat (322.1 million) as of Oct. 1, 2011.

During the third quarter of 2012, the amount of short-term loans increased by 7.35 percent, but by 0.43 percent per annum. As of early Oct. 2012, 32.4 percent of short-term lending accounted for feely convertible currency (1.054.1 billion manat).

Long-term loans as of Oct. 1, 2012 amounted to 8.228.2 billion manat (including 345.2 million manat overdue loans) compared to 7.805.0 billion manat (329.5 million overdue loans) as of early third quarter of 2012 and 6.523.0 billion manat (298.2 million manat) as of Oct. 1, 2011. During the third quarter of 2012, the amount of long-term lending increased by 5.4 percent, but by 26.14 percent per annum. As of early Oct. 2012, 32.6 percent of long-term lending accounted for freely convertible currency (2.685.4 billion manat).

According to the CBA, as of Oct. 1, 2012, the only state bank of the country (the International Bank of Azerbaijan) granted loans totaling 3.885.6 billion manat with a specific weight of 33.8 percent, and private banks - 7.284.1 billion manat with a specific weight of 63.4 percent. The remaining 2.7 percent fall to the share of non-bank credit organizations, which delivered loans worth 311.2 million manat.

The loans given to the population in Azerbaijani regions hit 1.372.9 billion manat as of Oct. 1 or 11.95 percent of the total volume of the loan portfolio of the banks.

According to the CBA, the figure was equivalent to 10.107.9 billion manat in Baku, including 6.720.6 billion manat as loans in national currency. In the reported period, interest rate of loans averaged 15.4 percent by Oct., including 14.6 percent in Baku.

In the period, the amount of crediting was equivalent to 344.2 million manat (average interest rate of 18.2 percent) in the Absheron economic region, 307.1 million manat (23 percent) in the Aran region, 34.8 million manat (22 percent) in the Mountain Shirvan region, 272.17 million manat (21.5 percent) in the Ganja-Gazakh region, 118.48 million manat (20.2 percent) in the Guba-Khachmaz region, 119.5 million manat (24.7 percent) in the Lenkoran region, 79.68 million manat (23.1 percent) in the Sheki-Zagatala region, 14.5 million manat (22.5 percent) in the Upper Karabakh region, 2.8 million manat (18.1 percent) in the Kalbajar-Lachin region, 81.5 million manat (12.3 percent) in the Nakhchivan region.

Most of all loans are granted to households in Azerbaijan. According to the CBA, in the third quarter of 2012 households received 35.2 percent or loans worth 4.042.5 billion manat.

The sphere of trade and services (24.8 percent or 2.846.1 billion manat) ranks second, the construction sector of real estate (9.6 percent or 1.103.4 billion manat) ranks third.

About 6.7 percent or 774.9 million manat accounted for industry, 4.6 percent (528.8 million manat) - agriculture and processing, 3.8 percent or 439.1 million manat - transport and communications, 3.5 percent (403.6 million manat) - power engineering, natural resources, 0.4 percent or 42.3 million manat of loans - rest areas.

As of early Oct. 2012, Azerbaijani banks reduced interest rates on loans in local and foreign currency.

As of Oct. 1, the average rate on bank lending to the Azerbaijani economy in national currency amounted to 15.43 percent compared to 16.27 percent as of Jan. 1, 2012, 16.07 percent as of Oct. 1, 2011.

The average rate on bank lending in freely convertible currency was 15.53 percent compared to 16.79 percent and 16.34 percent accordingly.

The average rate on bank lending to a legal entity in national currency amounted to 13.47 percent as of early Oct. compared to 14.53 percent as of Jan. 1, 2012 and 14.42 percent by Oct. 1, 2011.

The average rate on bank loans of a corporate client in freely convertible currency was 12.37 percent compared to 14.30 percent and 13.91 percent respectively.

As of Oct. 1, the average rate on bank credit for a physical entity in national currency amounted to 18.48 percent compared to 19.06 percent as of Jan. 1, 2012 and 18.77 percent by Oct. 1, 2011.

The average rate on bank credit for an individual client in freely convertible currency amounted to 22.42 percent compared to 22.90 percent and 22.62 percent accordingly.

Banking sector of Azerbaijan

As of the third quarter of 2012, the depositary base of Azerbaijani banks increased by 3.88 percent and increased by 15.33 percent compared to the same period of 2011.

According to the CBA, as of early Oct., the total amount of bank deposits, deposits of physical and legal entities totaled 10.080.6 billion manat compared to 9.704.3 billion manat as of early third quarter of 2012 and 8.740.6 billion manat as of early Oct. 2011.

The deposits in national currency - manat hit 4.559.9 billion manat, of which 1.863.5 billion manat - demand deposits, 2.696.4 billion manat - urgent deposits. The deposits in foreign currency hit 5.520.6 billion manat (1.492.3 billion manat and 4.028.3 billion manat respectively).

As of the third quarter of 2012, the volume of physical entities' deposits in banks in Azerbaijan increased by 4.2 percent, while the volume of legal entities' deposits by 3.6 percent. Individual clients' deposits increased by 25.78 percent compared to the third quarter of 2011, while corporate clients' deposits increased by 7.9 percent.

By early Oct., the volume of physical entities' deposits in the banks amounted to 4.556.3 billion manat compared to 4.372.6 billion manat in early third quarter of 2012 and 3.622.4 billion manat - as of Oct. 1, 2011.

According to the CBA, some 2.615.9 billion manat (57.4 percent) were placed by the population in the national currency - manat, 1.940.4 billion manat - in freely convertible currency.

There was a situation when cash deposits of Azerbaijan's population in the national currency exceed cash deposits in foreign currency. It should be stressed that the same situation was in December, November and August.

As of 2011, 2.281.6 billion manat (55.4 percent) of the population were placed in the national currency - manat, 1.838.1 billion manat - in freely convertible currency.

Deposits of the population, drawn to the banking system from the Azerbaijani regions (areas of the country, except for Baku), as of Oct. 1, 2012 amounted to 360.94 million manat or 7.9 percent of total volume of bank deposits.

The volume of deposits on Baku amounted to 4.556.3 billion manat, while the deposits in national currency hit 2.336.3 billion manat. The average percent rate in the country during this period was 8 percent while 8.1 percent in Baku.

The amount of deposits on Absheron economic region amounted to 104.77 million manat, with an average rate of 9 percent, Aran - 61.35 million manat at 4.6 percent, the Mountain-Shirvan - 9.7 million manat at 5.6 percent, Ganja -Gazakh - 72.3 million manat at 6.9 percent, Guba-Khachmaz - 25.01 million manat at 6.7 percent, Lankaran - 29.52 million manat at 6.4 percent, Sheki-Zagatala - 23.3 million manat at 5.2 percent, the Upper Karabakh - 11.16 million manat at 3.5 percent, Kalbajar-Lachin - 2.4 million manat at 5 percent, Nakhchivan - 21.4 million manat at 3.4 percent.

By early Oct., the volume of deposits of financial organizations hit 2.710.0 billion manat compared to 2.507.1 billion manat as of early third quarter of 2012 and 2.530.4 billion manat as of Oct. 1, 2011.

By early Oct. the volume of legal entities' deposits amounted to 5.524.3 billion manat compared to 5.331.7 billion manat as of early third quarter and 5.118.2 billion manat as of Oct. 1, 2011.

By early Oct., the volume of deposits of non-financial organizations hit 2.814.3 billion manat compared to 2.824.6 billion manat as of early third quarter of 2012 and 2.587.8 billion manat as of Oct. 1, 2011.

On Oct. 1, 2012 Azerbaijani banks significantly raised the rates on deposits of legal entities in manat, but reduced the rates for the same deposits in freely convertible currency. According to the CBA, the average rate on deposits in manat as of Oct. 1, 2012 was 10.21 percent compared to 10.26 percent as of Jan. 1, 2012, 10.78 percent as of Oct. 1, 2011.

The average rate on deposits in foreign currency amounted to 10.49 percent compared to 11.11 percent and 11.46 percent respectively. As of Oct. 1, 2012, the average rate on physical entities' deposits in manat was 10.53 percent compared to 10.76 percent as of early Jan. and 11.38 percent as of early Oct. 2011. The average rate on individual clients' deposits in foreign currency amounted to 10.82 percent compared to 11.27 percent and 11.59 percent respectively.

As of early Oct. 2012, the average rate on legal entities' deposits in manat was 6.97 percent compared to 5.60 percent as of Jan. 1, 2012 and 6.19 percent as of Oct. 1, 2011. The average rate on corporate clients' deposits in foreign currency was 4.27 percent compared to 7.02 percent and 8.04 percent respectively.

Banks' financial activity

According to the CBA, financial stability continued in the banking sector in 2012. The banks' capitalization level is high. There are sufficient reserves against risks. This year, the capital of banks increased by 18 percent and by 49 percent over the past four years.
The bank assets also increased by 11 percent this year and by 51 percent over the past four years. The ratio of bank assets to non-oil GDP is 65 percent.

The bank loans increased by 12 percent in 2012 and by 55 percent over the last four years. About 72 percent of loans are long-term, that is, investment-oriented.

The population's urgent deposits increased by more than 8 percent in 2012. Their volume have increased by 2.3 times since the beginning of the global economic crisis.

The share of external debt in financing the bank assets for the last four years has dropped from 20 to 13 percent. Liquid assets exceed liabilities on external debt by more than 100 percent.

Stable and reliable operation of payment systems has been ensured this year.

The amount of payments grew by 16 percent to 85 billion manat through the national payment system infrastructure for the nine months of 2012.

As of the third quarter of 2012, there were 43 banks in Azerbaijan: 42 commercial banks and one state bank. There are 22 banks with foreign capital compared to 23 banks as of the second quarter. This is connected with the revocation of Royal Bank's license on banking activity in July. The share of foreign capital in six banks hits from 50 to 100 percent, in 14 banks - up to 50 percent. Two local branches of foreign banks also operate.

As of the end of the third quarter of 2012, the number of banks in Azerbaijan, operating with profit, was 33. The figure remained at the same level during this quarter, decreasing by 2 compared to the second quarter and increasing by 1 in the third quarter of 2011.

According to the Azerbaijani Central Bank, the total profit of the banking system increased during the third quarter of this year by 68.5 percent. As of October 1, it amounted to 183.75 million manat, which is 42.76 percent more than the corresponding figure as of October 1, 2011.

The number of unprofitable banks in the third quarter did not change and remained at 10 or more than 1 as of the second quarter of this year and by 2 points less compared to the third quarter of 2011.

Ten banks' losses hit 93.57 million manat or 4.75 times more than in the third quarter of 2011 (19.66 million manat), but 5.3 percent less than in the second quarter of the year (98.8 million manat).

Financial results of the banks' activity (after paying taxes) in million manat

Despite the increase in losses among some banks and ceased activity of two Azerbaijani banks RoyalBank and Birlikbank in July, the Azerbaijani Central Bank has announced about a record growth of the banking system assets.

According to the CBA, as of Oct. 1, the banks' assets reached a new absolute record level from 15.513.85 billion manat to 15.998.22 billion manat as of Sept. 1. It was a record level this year. The assets of the banking system have a positive trend in 2012. They equaled 13.946.1 billion manat in 2012. The assets increased by 14.7 percent from early 2012, while by 17.9 percent per annum.

The basis of the assets of the banking sector (63.3 percent) fell to loans given to customers to the amount of 10.130.4 billion (annual growth of 15.7 percent), investments (1.256.7 billion manat, increasing by 2.3 percent) and funds on the correspondent accounts (1.069.0 billion manat with a decrease of 4.5 percent). Loans and deposits given to the financial sector amounted to 769 million manat (with an increase of 28 percent).

The deposits hit the main part in the structure of liabilities (7.058.3 billion manat, 44.12 percent), or 15.4 percent more compared to the same period of last year. Loans and deposits obtained from the financial sector hit 4.755.8 billion manat, increasing by 8.45 percent.

In the third quarter of 2012, the capitalization of the Azerbaijani banking sector increased by 5.3 percent and by 0.07 percent compared to third quarter of 2012, amounting to 2.346.6 billion manat as of Oct. 1.

According to the CBA, the number of banks with capital exceeding 10 million manat was 39 as of July, reducing by one compared to June, and by 3 compared to late 2011. The share of this category of banks in the total capital of all banks in the country as of the third quarter was 99.1 percent compared to 99.4 percent as of the third quarter of 2011.

Two banks' capital (with a weight of 0.7 percent) was formed in the range of 5 million manat to 10 million manat, one bank (0.2 percent) - from 3.5 million to 5 million manat manat, another bank - to 3.5 million manat.

Stock market

The total turnover of transactions on all instruments on Baku Stock Exchange (BSE) for January-September 2012 totaled 7.889 billion manat, or by 38.83 percent more compared to the same period of 2011.

Such an increase in stock market in the country is ensured by increasing the state securities market by 39.86 percent, while the corporate securities market increased by 28.14 percent.

The state securities market reached 7.26 billion manat influenced by the increase in repo transactions by 46.07 percent and growth of operations with the notes of the Central Bank by 33.64 percent.

The increase in the corporate securities market is explained by the increase in the volume of transactions with corporate bonds by 4.13 times. The volume of the corporate securities market was 636.6 million manat in January-September.

Comparative table on the results of trades of Corporate Securities at BSE (January-September 2012)

Comparative table on the results of trades of Government Securities at BSE (January-September 2012)

Abbreviations:
- GB - government bonds,
- GS - government securities,
- CB - corporate bonds,
- CS - corporate securities.

The Azerbaijani National Depository Center stressed the increase in the stock market turnover in September 2012. Phenomenal growth rates were recorded in 2011, when the turnover of the securities market in the country exceeded the turnover for 2010 by 4.69 times.

According to the center, around 397 transactions with securities with a nominal value of 307.99 million manat were signed in Sept. 2012 compared to 287 transactions with securities worth 150.04 million manat in August and 150 transactions with a total nominal value of 27.549 million manat in January this year.

As a result, the turnover for 2012 totaled 2.758.4 billion manat on 3,338 deals compared to 2.420.6 billion manat on 4,992 transactions for 2011.

Around 6 deals on placing the shares worth 204.5 million manat, 357 stock exchange transactions worth 31.591 million manat and 34 off-exchange transactions worth 71.929 million manat were concluded in Sept. The placement on 164 transactions hit 400.206 manat, off-exchange transactions on 458 transactions - 472,135 manat, stock exchange transactions on 2,648 transactions - 2.239.19 million manat in January-September.

The turnover does not include the transactions with securities of the Ministry of Finance and the Azerbaijani Central Bank.