Review of monetary sector in Azerbaijan (January-August 2016)

The Central Bank of Azerbaijan (CBA) increased the interest rate from 7 to 9.5 percent starting Aug. 8. The CBA said the interest rate increase is aimed at formation of real interest rates at a level that will stimulate the attraction of deposits in national currency, and thus, increase its credibility. This measure will also allow increasing attractiveness of sterilization operations held by the CBA.

The CBA’s currency reserves increased by $29,600 (0.7 percent) to $4.192 billion in August 2016 as compared to July.

The CBA’s currency reserves have decreased by 824.2 million manat, or by 16.4 percent since early 2016.

The reduction in the CBA’s currency reserves began in July 2014. The reduction was at a slower rate (in the range of $20-50 million) at the beginning, but a sharp decline in the volume of reserves began in December 2014 due to an increase in demand for dollar in the country.

Currency market and manat rate

The national currency rate is based on supply and demand on the foreign exchange market, as well as on the basis of internal and external fundamental factors.

The CBA may intervene [through currency interventions] in the rate regulation only if there are serious problems.

The official exchange rate of manat to the US dollar continued declining in August. According to the CBA, a decrease in the nominal effective exchange rate of manat had an impact on the depreciation of the real effective exchange rate of manat. The downward trend in real and nominal effective exchange rates is a factor supporting import substitution and export stimulation.

The official exchange rate of US dollar to manat was 1.5610 manat in early 2016. The record index for the reporting period was 1.6456 manat March 11 and the rate reached 1.6321 manat by late August.

Azerbaijani monetary market

The money supply rate (M2) (cash in circulation (outside banks) and remainders in the national currency on accounts of non-financial organizations, financial organizations (excluding credit organizations) and physical entities) amounted to 9.86 billion manat in August 2016 decreasing by 2.33 percent for the month and increasing by 3.3 percent for the year, the CBA's report said.

The amount of cash money supply (M0) increased by 4.7 percent for the year from 5.5 billion manat to 5.76 billion manat. M0 decreased by 1.3 percent compared to the previous month.

As of August 2016, Broad Money Supply (M3) totaled 21.15 billion manat or 19.3 percent more compared to August 2015 and by 0.25 percent more than in late August 2016.

The transaction money (M1) increased by 15.1 percent for the year and decreased by 2.9 percent and amounted to 8.16 billion manat compared to July.

Parameters of monetary market, in billion manat:

Monetary market parameters	Volume, August 2016
Money mass in extensive understating (М3)	21154,1
Money mass on manat (М2)	9861,4
Cash in manat (М0)	5763,4
Non-cash in manat	4098

The bank reserves in Azerbaijan amounted to 2.14 billion manat as of September 1, 2016, or nearly three times more than in August 2015 (762.7 million manat).

The report said that the broad monetary base in the country as of September 1, 2016, amounted to 8.48 billion manat.

In annual terms, the monetary base in Azerbaijan increased by 23.1 percent. For comparison: this figure amounted to 6.89 billion manat as of late August 2015. Compared with early 2016 (7.56 billion manat), the monetary base in Azerbaijan increased by 12.2 percent.

According to the CBA, as of September 1, 2016, the monetary base in manat amounted to 7.41 billion manat compared to 6.35 billion manat as of September 1, 2015.

The volume of currency in circulation amounted to 6.33 billion manat during the reporting period, while this figure stood at 5.42 billion manat as of September 1, 2015.

The ratio of cash in circulation to monetary base as of September 1, 2016 amounted to 74.6 percent, which is a 14.3 percentage points decrease compared to the index as of September 1, 2015.

Azerbaijan’s loan market

The credit portfolio of Azerbaijani banks increased by 0.75 percent up to 16.84 billion manat in August 2016 compared to the previous month.

Azerbaijani banks decreased lending to the economy by 16.2 percent compared to August 2015.

According to the CBA’s report, the banks issued over a half of loans worth 8.75 billion manat (52 percent) in the national currency, while the rest part – 8.08 billion manat (48 percent) in foreign currency.

This ratio reached 73 and 27 percent in early 2015. But the share of foreign currency loans began increasing, reaching 49.3 percent as of the year after the February devaluation of the manat. However, Azerbaijan’s Financial Market Supervisory Body has established a moratorium on the issuance of consumer loans in foreign currency to the individuals who do not have foreign exchange earnings and bank deposits since April 2016 and imposed a ban on mortgage loans in foreign currency since May.

Moreover, some banks have started to convert dollar-denominated loans into manat ones. As a result, the share of manat loans began to grow gradually. For comparison, some 50.9 percent of the loan portfolio of banks accounted for the loans in national currency in January-March 2016, while 51.9 percent in January-June.

The volume of overdue bank loans increased by 5.9 percent and reached 1.59 billion manat in Azerbaijan in August 2016 compared to July.

The share of the loans in the loan portfolio of banks was 9.46 percent compared to 8.98 percent as of late July. The share of overdue loans in a total loan portfolio of banks amounted to 6.6 percent in August 2015. As of September 1, 2016, the volume of short-term loans amounted to 3.63 billion manat (including overdue loans worth 511 million manat) increasing by 1.97 percent for the month and decreasing by 16 percent per annum.

The volume of long term loans increased by 0.38 percent for the month and decreased by 16.2 percent up to 13.21 billion manat for the year (including 1.082 billion manat of overdue loans).

According to the CBA, the credit portfolio of the state banks reached 5.51 billion manat with the specific weight of 32.7 percent, while private banks issued loans worth around 10.82 billion manat with a specific weight of 64.2 percent. Some 4.37 billion manat of the amount account for the banks with foreign capital.

The remaining 3.1 percent accounted for the share of non-bank credit organizations which issued 511 million manat. Some 34 banks, including two state-owned banks, 157 non-bank credit organizations, including 109 credit unions operated in Azerbaijan in August.

According to the report, the largest part of the total loan portfolio of banks – 37.2 percent (6.273 billion manat) accounts for the household lending in January-August 2016.

According to the report, the trade and services sector (14.9 percent or 2.504 billion manat) ranked second, the construction and real estate sector (12 percent or 2.021 billion manat) ranked third in the total loan portfolio of banks.

The industry and production sector received 1.321 billion manat (7.8 percent of the total lending volume).

Some 7 percent (1.176 billion manat) accounted for the loans issued in transport and communication, 2.4 percent (400.7 million manat) - agriculture and processing, 2.2 percent (370.3 million manat) - energy, chemistry, and natural resources, 16.5 percent (2.694 billion manat) – the rest areas, the report said.

The loans given to the population in Azerbaijan's districts totaled 2.56 billion manat in August 2016, or 15.2 percent of the banks' total loan portfolio and 22.7 percent less than in the same period of 2015, the report said.

According to the report, the loans worth 14.27 billion manat were issued in Baku.

The loans in national currency (manat) amounted to 7.04 billion manat (49.3 percent).

For comparison, the loans amounting to 16.78 billion manat were issued in Baku in August 2015. Some 9.03 billion manat (53.8 percent) of that amount accounted for the loans in national currency.

The average interest rate on loans throughout the country was 11.4 percent in August 2016, while in Baku that index stood at 9.8 percent.

The lending volume in the Absheron economic district totaled 518.6 million manat at an average rate of 16.6 percent.

In other economic districts the lending index was as follows: Aran – 629.5 million manat at a rate of 22.5 percent, Mountainous Shirvan – 109.5 million manat at a rate of 20.5 percent, Ganja-Gazakh – 534.45 million manat at a rate of 19.8 percent, Guba-Khachmaz – 201.09 million manat at a rate of 19.8 percent, Lankaran – 235.9 million manat at a rate of 22 percent, Shaki-Zagatala – 179.85 million manat at a rate of 21.6 percent, the Upper Karabakh – 43.9 million manat at a rate of 18.3 percent, Kalbajar-Lachin – 1.16 million manat at a rate of 13.3 percent, Nakhchivan – 109.8 million manat at a rate of 13.2 percent.

Azerbaijani banks reduced the average interest rate on loans in national and foreign currencies in August 2016 compared to the previous month. According to the report, the average rate on loans issued in national currency amounted to 12.28 percent in August compared to 12.37 percent in July.

The average interest rate on loans reached 13.72 percent in August 2015. The average rate on loans in freely convertible currency made up 10.21 percent in August 2016 compared to 10.30 percent in July 2016 and 13.01 percent in August 2015.

The legal entities received manat loans on an average rate of 8.20 percent in August compared to 8.15 percent in July 2016 and 9.94 percent in August 2015.

The average rate on bank lending to the corporate clients in foreign currency amounted to 6.17 percent in August 2016 compared to 6.25 percent in July and 9.23 percent in August 2015. As of August 2016, the average rate on manat loans to physical entities amounted to 16.41 percent compared to 16.71 percent in July and 17.82 percent as of September 1, 2015.

The average rate on bank lending to the individual customers in foreign currency was 18.65 percent compared to 18.77 percent and 21.83 percent accordingly.

Mortgage lending

The Azerbaijan Mortgage Fund (AMF) received 4.2 million manat from the country’s state budget in August 2016, which is 2.4 percent more than in August 2015, said the report.

The total volume of refinancing the loans issued by banks earlier was 1.1 million mantas in the previous month.

The budgetary funds obtained by the IMF for social mortgage since early 2016 exceeded 32.4 million manat. In general, 50 million manat are envisaged for these purposes in the state budget in 2016.

During August, as in the previous three months, Azerbaijani banks didn’t issue any home loan, while in May-August 2015, the volume of mortgage lending totaled 240.5 million manat.

The placement of mortgage bonds wasn’t carried out either in August 2016 as during the whole year. The suspension of mortgage lending is associated with the reorganization of the AMF, the fund will continue issuing loans after the approval of the relevant legal acts.

The average monthly amount of the loan issued by the authorized banks of the AMF amounted to 40,882 manat in August 2016 (this figure amounted to 40,699 manat in August 2015).

The average period for which the loan is issued is 280 months (280 months), the average annual interest rate is 6.7 percent (6.72 percent a year earlier), and the average amount of payments is 295.9 manat (297.5 manat).

In general, the AMF’s authorized credit organizations issued 17,997 mortgage loans worth more than 730.8 million manat from 2006 up till now.

According to the new mortgage loan issuance order, approved in June 2016, an ordinary mortgage loan will be issued only to Azerbaijani citizens and only in the national currency for a term from 3 years to 25 years, while preferential mortgage - up to 30 years to purchase a residential area, owned by the citizen. Interest rates on conventional mortgage must not exceed eight percent, while 4 percent per annum in preferential mortgage loan.

The maximum amount of the mortgage loan (including preferential) is determined by Azerbaijan Mortgage Fund JSC and must not exceed the cost of repaired housing with an average of 100 square meters in zone #7 in Baku. Annual interest rates on the loan are determined by the company’s Supervisory Board.

The amount of preferential mortgage loan must be 85 percent of the cost of purchased housing by the date of the loan issuance, except for cases when a borrower appeals to decrease the loan amount. The amount of conventional mortgage loan must not be less than 75 percent and more than 85 percent of the cost of purchased housing by the moment of the loan issuance, except for the cases when a borrower appeals to decrease the loan amount.

The monthly payment for a mortgage loan must not exceed 70 percent of a debtor's monthly income. The age of the borrower must not exceed the retirement age according to the legislation. An agreement on life insurance is required.

The family members of war victims, national heroes, internally displaced persons, civil servants with at least a three years' experience, teachers of secondary schools with at least a five-year service term, PhDs, doctors of science and those having special merits in sport as well as the military with at least a three-year service term can use the preferential conditions. Each family having the right to such a mortgage can only use the opportunity.

At present, the authorized banks of the Azerbaijan Mortgage Fund are 26 banks.

The participants of the mortgage market are 18 insurance companies [in total, 24 companies] and 16 appraisal organizations.

Azerbaijan’s banking sector

The economic cycles, seasonal factors and the attitude of investors, dictated by a variety of causes, impact on the dynamics of deposits.

As of early September, the total amount of deposits of physical and legal entities in the country's banks amounted to 23.67 billion manat, increasing by 1.8 percent for the month. The deposits increased by 34 percent in the banks compared to August 2015.

The amount of deposits in the Azerbaijani national currency – manat has reached almost 4.49 billion manat in the country’s banks, decreasing by 3.4 percent for the month, the report said.

The amount of deposits increased by 1.35 percent per annum.

According to the report, as of early September, the amount of manat deposits has reached 19 percent compared to 20 percent as of early August.

Almost 54 percent of manat deposits accounted for demand deposits, the rest amount - term deposits, the report said.

According to the report, the deposits in freely convertible currency increased by 3.2 percent up to 19.2 billion manat for the month (5.4 billion manat - demand deposits, 13.8 billion manat - term deposits).

The share of the deposits in freely convertible currency in the banks’ deposit base increased from 80 percent to 81 percent for the month, the report said.

The foreign currency deposits were increasing after the devaluation in February 2015. For comparison: 51.7 percent of the banks' deposit base was formed in January 2015 through the deposits in freely convertible currency. However, as of 2015, that index reached 81.6 percent.

According to the report, the physical entities' deposits reached 7.9 billion manat in August 2016.

Most of the physical entities' deposits accounted for the ones in the foreign currency – 82.3 percent or 6.5 billion manat, the report said.

According to the report, the population’s deposits increased by 1.1 percent for the month, while 8.3 percent per annum.

The total volume of the legal entities’ deposits in Azerbaijani banks reached 15.7 billion manat or by almost 2 percent more than in the previous month and by 52.4 percent more than in late August 2015, the report said.

According to the report, the amount of the Azerbaijani financial organizations’ deposits reached 5.92 billion manat.

The amount of the Azerbaijani non-financial organizations’ deposits reached 9.8 billion manat

The population’s deposits, attracted to Azerbaijan’s banking system from the country’s districts (except for Baku), totaled 482.3 million manat as of August 2016, that is, 6.3 percent of the total bank deposits, the report said.

The deposits of the residents of Azerbaijani districts decreased by 2.14 percent compared to July, while by 12.7 percent compared to August 2015.

According to the report, the foreign currency savings of the residents of Azerbaijani districts amounted to 247.6 million manat or 51.3 percent of all deposits in the banks in the districts in the reporting period.

As of August 2016, the average interest rate throughout the country and Baku reached 5.3 percent.

Thus, the Absheron economic region is still the leader on such indices as attracting the population’s deposits by the banks (152.55 million manat, average rate – 6.4 percent per annum).

During this period, the volume of deposits in the Aran economic region – 77.8 million manat at a rate of 4.9 percent, Mountainous Shirvan – 12.1 million manat at a rate of 6 percent, Ganja-Gazakh – 107 million manat at a rate 5.6 percent, Guba-Khachmaz – 32.8 million manat at a rate of 5.9 percent, Lankaran – 35.8 million manat - the rate of 6.5 percent, Sheki-Zagatala – 29.4 million manat - the rate of 4.6 percent, Upper Karabakh – 7.35 million manat – 2.7 percent, Kalbajar-Lachin – 0.29 million manat – 9.3 percent, Nakhchivan – 27.2 million manat – the average rate of 2.5 percent.

The average interest rate on deposits in Azerbaijani banks increased in national currency and decreased in foreign currency in August 2016, the report said.

The average rate on bank deposits in manat made up 8.55 percent in August 2016 compared to 7.71 percent in July 2016 and 7.98 percent in August 2015.

The average rate on deposits in foreign currency amounted to 4.97 percent in August 2016 compared to 5.14 percent in July 2016 and 8.33 percent in August 2015.

The banks drew deposits of legal entities in manat in the amount of 6.16 percent per annum in August 2016 compared to 5.63 percent and 4.34 percent in July 2016 and August 2015 accordingly.

The funds on the accounts denominated in the foreign currency brought 3.36 percent to legal entities in August 2016, 3.47 percent in July 2016 and 3.99 percent in August 2015.

As of September 1, 2016, the average interest rate on deposits of physical entities in manat made up 9.80 percent compared to 8.84 percent as of August 1 and 9.49 percent as of September 1, 2015.

The interest rates on deposits of physical entities in foreign currency are as follows: 6.17 percent in August 2016, 6.33 percent in June 2016 and 9.33 percent in August 2015.

Azerbaijani banks sold $243.44 million in August 2016. According to the report, the sale of dollars decreased by 12 percent compared to the previous month, while by more than five times compared to August 2015. The banks bought $203.87 million in August 2016, which is 14 percent more than in July and 40.9 percent less than in August 2015.

Volume of foreign exchange operations in August 2016

Currency	Purchase (thousand standard unit)	Sale (thousand standard unit)
US dollar	203 868,7	243 437,5
pound sterling	772,1	5 332,1
euro	21 755,5	47 714,5
Russian ruble	1 216 270,9	201 372,5