Weekly actual topics in Azerbaijan (Feb. 15-19)

Azerbaijan, India should expand co-op in pharmaceutics

Azerbaijani pharmaceutical specialists should think about cooperation with India, Ramiz Aliyev, director general of the Turkish-American Medical Center, member of the board at the Azerbaijan Confederation of Entrepreneurs, said.

"The Indian pharmaceutics is well known in the world," he said. "But, unfortunately, there is a negative opinion about Indian medicines in Azerbaijan. I would like to stress that the medicine production in India stands at a very high level."

"Most medicines have international certificates," he said. "The latest technologies are being used in medicine production and expenses are little. I believe that cooperation in this area would be useful for Azerbaijan."

Aliyev also said India has recently expressed a great interest in developing relations with Azerbaijan in the medicine and public health sectors.

"There is a network of world-renowned Medanta hospitals in India," he said. "Medanta is interested in realizing joint projects with Azerbaijan."

He also said Azerbaijan and India can cooperate through Indian investments in Azerbaijani medical sector and establishment of joint ventures in the country, as well as in the medical tourism, which is widespread in India.

Azerbaijan ready to support banking sector - S&P

Standard & Poor's Ratings Services views the trend for industry risk in Azerbaijan's banking sector as stable.

"We view the trend for industry risk in Azerbaijan's banking sector as stable, and expect that the industry structure will remain broadly the same," the agency said. "This backs our view of Azerbaijan's government as supportive of the domestic banking sector. We believe that although the current turmoil could reduce the number of banks in the system, it is unlikely to change the overall competitive landscape materially."

Azerbaijan remains heavily dependent on the hydrocarbons sector, which accounted for about 40% of GDP and 95% of merchandise exports in 2013-2014. Furthermore, last year the foreign exchange reserves of the Central Bank of Azerbaijan (CBA) reduced by more than 40% in six months to about $5 billion, compared with a peak of about $15 billion at midyear 2014. The CBA subsequently abandoned its peg of the manat to a basket of dollars and euros, causing the local currency to weaken by more than 30% against the U.S. dollar by year-end 2015.

Even though the manat's depreciation will help the CBA protect its remaining foreign exchange reserves and ease fiscal pressures, it will also lead to a significant decline in income levels.

"We assume that the price of Brent crude oil will likely be $40-$45 per barrel in 2016- 2017," the statement said.

"We now believe that Azerbaijan's economy is in a correction phase, which has had a high impact on the banking sector, as shown by banks' elevated credit costs and nonperforming loans (NPLs; loans overdue by more than 90 days)," the statement said. "A prolonged period of low oil prices may test the government's ability to maintain its spending initiatives, in our view."

"This could put additional pressure on banks' financial fundamentals if asset quality deteriorates because of borrowers' reducing debt-servicing capacity," the statement said.

"We expect the erosion of asset quality to accelerate in 2016, with NPLs and restructured loans potentially reaching 23%-25% of systemwide loans; banks' officially reported NPL ratios didn't exceed 7% at year-end 2015."

Unlike banks in peer countries such as Hungary or Georgia, Azerbaijani banks had limited risks from foreign currency lending before 2015, due to the CBA's fixed manat-to-U.S. dollar exchange rate.

Consequently, lower confidence in the manat has widened the currency mismatch on banks' balance sheets, since customers converted large amounts of manat deposits into foreign currency in 2015.

"In our view, this trend will likely continue in the coming years, putting additional strain on the sector's financial performance and liquidity management," the agency said.

Over 2008-2014, lending in foreign currency decreased somewhat due to the stability of the local currency. However, due to the manat's decline, these levels increased as of Jan. 1, 2016, following loan revaluations.

"We anticipate that by the end of this year, the share of loans denominated in foreign currencies will likely reach 50% of systemwide loans, compared with 27% as of year-end 2014," the agency said. "This increases banks' vulnerability to currency volatility and the credit risks in their loan portfolios."

"The banking regulator has reported NPLs at 6.6% of system loans as of Nov. 30, 2015," the statement said. "At the same time, because the shadow economy in Azerbaijan is large, it's difficult to assess borrowers' real debt-servicing capacity and therefore also the true extent of problem loans."

Moreover, although the banking system has a relatively high level of core customer deposits and is not reliant on external funding, the rapid manat depreciation in 2015 could lead to a protracted currency mismatch on banks' balance sheets. This is because foreign currency funding had increased to about 80% of banks' customer funds by year-end 2015, but the banks have limited abilities to match this with foreign currency denominated loans. There are 37 banks in Azerbaijan.

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