SOFAZ exploring opportunities to increase investment in China
State Oil Fund of Azerbaijan (SOFAZ) is studying the possibilities of increasing investment in China, the fund told Trend.
"The decision of the IMF (International Monetary Fund) to confirm the status of the RMB (the renminbi - the official currency of China) as a reserve currency and its inclusion in the SDR (Special Drawing Rights) basket is positively estimated for China's economy and the yuan in the long term," said the fund. "It is expected that the decision, which will come into force starting from October 1, 2016, will become the cause for the increased use of the yuan at the international level and the increase of significance of the currency."
"In this regard, SOFAZ as part of its investment policy is exploring opportunities for further investment in the Chinese market in details," according to the fund.
The oil fund said that in the future, based on market conditions, along with increased investment in government bonds of China, SOFAZ may consider investing in other financial instruments, including stocks.
SOFAZ named commitment to provide high diversification of its currency basket and the desire to invest in the national currency of the second largest economy in the world, which will become one of reserve world currencies in the future, the main aims of starting to invest in China in the amount of three billion yuans starting from July 1, 2015 after receiving a license from the central bank of this country.
In accordance with the "Rules on management of foreign currency assets of the State Oil Fund of the Republic of Azerbaijan", funds in SOFAZ's investment portfolio can be invested in securities that are denominated in currencies of G7 countries (USA, Germany, Great Britain and Kingdom Northern Ireland, France, Italy, Canada and Japan), European Monetary Union member countries, Russia and Turkey, as well as the countries with a long-term credit rating not less than "A" (Standard & Poors, Fitch) or "A2" (Moody's).
As of October 1, 2015, SOFAZ assets reduced by 6.38 percent compared to early 2015 ($37.1 billion) and were estimated at $34.74 billion.
Some 74.1 percent of the investment portfolio of the State Oil Fund of Azerbaijan (SOFAZ) was invested in financial tools for up to five years in January-September 2015.
As of October 1, 2015, the total volume of SOFAZ investment portfolio is $34.6 billion or 99.6 percent of the total volume of assets.
Around 30.8 percent of SOFAZ investment portfolio is placed in securities for a one-year period, 28.3 percent for one to three years, 15 percent for three to five years and 9.2 percent for more than five years. Some 16.7 percent is kept in real estate, assets and gold.
SOFAZ assets are partially placed in securities, tools of the monetary market such as deposits and bank accounts.
Some 81.6 percent of the investment portfolio is placed in bonds. Around 9.96 percent accounted for the securities with 'AAA' ratings, 28.26 percent in 'AA', 38.19 percent in 'A', and 23.59 percent in 'BBB'. SOFAZ assets cannot be placed in securities with a lesser investment rating.
Currently, 12.5 percent of SOFAZ investment portfolio is placed in bonds of agencies and international organizations, 8.1 percent - sovereign debt securities, 19.2 percent - financial bonds, 44 percent - corporate bonds, 9.3 percent - short term commercial securities, 1.7 percent - guaranteed bonds.
Around 5.2 percent of the investment portfolio is placed in deposits and monetary market tools, gold - 3.2 percent, real estate- 4.3 percent, assets - 7 percent, investments in the projects - 2.2 percent.
SOFAZ was established in 1999 with assets of $271 million.
Based on SOFAZ's regulations, its funds may be used for the construction and reconstruction of strategically important infrastructure facilities, as well as solving important national problems.
The main goals of the State Oil Fund include: accumulation of resources and the placement of the fund's assets abroad in order to minimize the negative affect on the economy, the prevention of "Dutch disease" to some extent, promotion of resource accumulation for future generations and support of current social and economic processes in Azerbaijan.
Fitch recommends large Azerbaijani banks to increase capitalization
Fitch International rating agency has assigned a negative outlook for the banking sector of Azerbaijan, leaving rating outlook stable, the "2016 Outlook: CIS and Georgian Banks" report of the agency said.
Banking sector outlooks are negative across most countries of the Commonwealth of Independent States (CIS), according to the report. This reflects Fitch Ratings' view that lenders' financial metrics are likely to weaken further in 2016, as slower economies, weaker currencies and higher interest rates continue to hit asset quality, profitability and capital.
However, Fitch forecasts at least moderate positive economic growth across the region (Belarus excepted) in 2016, which limits downside risks, and capital buffers are significant in some markets.
"The negative sector outlook reflects the heightened vulnerability of banks' asset quality, performance and capital due to increased dollarisation and the devaluation of the manat by 34 percent in the first quarter of 2015," said the report. "However, potential cyclicality of banks' asset quality and performance is already factored into their low ratings (with VRs mostly in the single 'b' category), and therefore rating outlooks on the banks are mostly stable."
The quality of corporate loans (61 percent of all sector lending) is undermined by considerable project finance lending to start-ups, long tenors/grace periods on principal repayments and the limited financial transparency of the corporate sector. These risks have increased due to the potential reduction in government spending, investment and consumption.
FX (foreign exchange)-denominated loans (45 percent of all loans; 56 percent of corporate lending at the end of the third quarter of 2015) represent the major source of credit risk, as most borrowers do not have export revenues.
"The quality of unsecured retail and micro- lending, which grew very rapidly in 2012-2014, is also likely to weaken as portfolios season," said the report. "Near-term retail growth potential is constrained by weakened internal capital generation capacity at some banks and increased consumer indebtedness for those that borrowed in foreign currency."
Increased deposit dollarisation results in banks' structural inability to hedge their short open currency positions by any other means except issuing foreign-currency loans, increasing future credit risks, according to the report. Many banks in the sector operate with unhedged short FX positions and are exposed to significant one-off translation losses in case of further manat devaluation which, in some cases, could seriously hit their capital.
"Larger Fitch-rated banks should have sufficient capital to absorb potential credit losses and mitigate FX risks," said the report. "Capitalization at smaller banks is weaker due to: faster recent loan growth (particularly in retail), translating into more rapid capital consumption; moderate earnings due to a lack of scale and growing loan impairment charges; and only limited new equity injections being available from private shareholders."
Manat-denominated liquidity in the sector is fairly tight at present due to the limited inflow of manat-denominated funding. In case of unexpected funding outflows, the banks may also exchange foreign currency for manats at the central bank (which has historically been rather supportive on liquidity). There have been no significant retail deposit outflows at Fitch-rated banks during 2015.
"Structural improvements in the highly cyclical and commodity-dependent economy could give rise to moderate upside potential for banks' ratings," said the report.
There are 43 banks operating in Azerbaijan, and two of them are semi-state ones.