Weekly actual topics in Azerbaijan (July 10-14)

Analysis Materials 17 July 2017 17:31

Ilham Aliyev: Southern Gas Corridor to be implemented successfully

Three Balkan countries can also join the Southern Gas Corridor in the future, said Azerbaijan’s President Ilham Aliyev during the 22nd World Petroleum Congress in Istanbul.

He went on to add that the Southern Gas Corridor project consists of four parts.

“The first one is the Shah Deniz gas field. The Shah Deniz 2 project is 93 percent complete and will be fully completed soon. The second one is the South Caucasus Pipeline which connects Azerbaijan and Georgia. The work on this project is 87 percent complete. The third and the most important part is the TANAP gas pipeline which is 77 percent complete. We will mark the execution of this project next year. Finally, the fourth part is the Trans Adriatic Pipeline, which is 44 percent complete,” he said, adding that all these four important projects constitute the Southern Gas Corridor.

The president noted that $40 billion worth of investment is needed for the implementation of the Southern Gas Corridor project and the major part of this amount has already been invested.

Azerbaijan’s proven gas reserve is estimated at 2.6 trillion cubic meters and in the coming years, over decades, Azerbaijani gas will meet the demand of both European countries and countries of the region, added President Aliyev.

The president pointed out that seven countries participate in the implementation of the Southern Gas Corridor project: Azerbaijan, Georgia, Turkey, Bulgaria, Greece, Albania and Italy.

“Three Balkan countries can also join the Southern Gas Corridor in the future and relevant work is underway in this regard. That’s to say, we are expanding this project’s geography and can further expand in the future, because this project is an initiative benefiting every country,” said the president.

Implementation of this project shows that all countries and companies participating in it get benefit, said President Aliyev.

“We have created such a great cooperation format in which both producers, that’s to say, Azerbaijan and transit countries, as well as consumers work on the basis of common interests. This balance of interests paved way for the successful implementation of this major project, because there are quite a lot of technical, financial, economic and political issues,” said the president.

“Today, we can already say that the Southern Gas Corridor project will be implemented successfully and Azerbaijan will provide both European countries and the countries of the region with natural gas for many years to come,” added President Aliyev.

Azerbaijan’s banking sector ready to actively lend to economy - ABA

Azerbaijan’s banking sector is able to continue active lending to the country’s economy, Zakir Nuriyev, head of the Azerbaijan Banks Association (ABA), said.

He said that despite the decline in activity, banks continue to lend to both economy and individuals, as well as legal entities.

“If one looks at the figures for the last six months of 2017, one can see that the activity of banks’ lending to the economy has slightly decreased, but the banks continue this process,” Nuriyev said. “The volume of loans issued by the banking sector in January-June 2017 amounted to 2.2 billion manats. This shows that banks continue lending to the economy, individuals and legal entities, but the volume of demand on the part of economy doesn’t grow. The decrease in the volume of external debt and funds raised by banks abroad also shows that the demand on the part of the economy and population itself decreased.”

He added that the main reason for the decline in lending is the reduction in demand on the part of the economy.

“To date, funds on correspondent accounts of Azerbaijan’s banks amount to 1.5 billion manats, and about 700 million manats of them are placed in the notes of the country’s Central Bank and government bonds of Azerbaijan’s Finance Ministry,” he noted. “If one looks at foreign currency correspondent accounts, the funds on them amount to over 4.5 billion in manat equivalent.”

“This shows that Azerbaijan’s banking sector has a sufficient number of liquid assets,” he said. “However, due to low throughput and insufficient activity of the transmission mechanism of the economy, the country’s banking sector isn’t able to allocate loans to the economy in the planned volumes.”

Banking community offers to create mechanism to protect creditors’ rights in Azerbaijan

The Azerbaijani banking sector will continue to operate at a loss in 2017, Zakir Nuriyev, head of the Azerbaijan Banks Association (ABA), said.

"The banking sector is operating today at a loss as a result of the problems that have arisen in the banking sector, in particular, the big amount of problem loans,” he said. “It will also continue in 2017. The banking sector will be able to reach profitability only in the coming years.”

“The restoration processes are underway in the sector,” he said. “Some banks increase their capital, so I think that banks will continue capitalization. The consolidation processes will continue in the market to increase profit and optimize costs. But we will see the results in the coming years."

He added that a mechanism of protecting the creditors’ rights must be created in the country to overcome the current situation.

"If anyone being solvent takes a loan and does not return it, rather, does not want to return it, the measures must be taken, as in case of non-fulfillment of obligations on tax, social and utility bill debts," he said. “There must be a similar mechanism in the banking system."

Nuriyev added that in case of non-repayment of a loan, banks can not timely fulfill their obligations to depositors.

"At present, the deposit portfolio of Azerbaijani banks is 7 billion manat, which is about 7 million accounts, which is a big amount,” he added. “The banks must pay the interest in time. If we do not protect the creditor's rights, the creditor will be unable to fulfill his duties in time. We will be unable to call creditors for more active lending to the economy and individuals.”

According to the Azerbaijani Central Bank, the commercial banks' loan portfolio amounted to 15.45 billion manat in January-April, 1.59 billion manat of which are problem loans.

Thirty one banks operate in Azerbaijan.

ABA talks on debts of Azerbaijan’s real economy

To date, Azerbaijan’s real economy owes 27.8 billion manats to the country’s banking sector, Head of Azerbaijan Banks Association (ABA) Zakir Nuriyev said.

“Over 67 percent of this amount, that is 18.7 billion manats, account for non-performing loans,” Nuriyev said. “In general, the probability of loan default is 30 percent.”

This is one of the reasons for high interest rates on loans issued by Azerbaijani banks, he added.

“However, one always needs to analyze the reason for such high interest rates,” he said. “The cost of a loan today accounts for 15 percent of the interest rate on loan – this is the interest rate on deposits accepted by banks. Banks’ operating costs account for a maximum of three percent. It is also necessary to take into account the profit margin, which differs depending on a bank.”

“The remaining part (10-30 percent of the interest rate on loan) accounts for the risk premium, which includes the default risk, the mechanism for the implementation of collateral and the risks associated with the exchange rate,” Nuriyev said.

He went on to add that the processes, which have been taking place in recent years in Azerbaijan’s banking sector are the reason for the high share of the risk premium in the formation of interest rates on loans.

As a result, in 2016, unprofitability of bank assets in Azerbaijan was 18.3 percent, he noted.

“It is interesting that after a bank implements liquid collateral, which makes up 170 percent of the loan amount, the bank regains only 45 percent of the issued loan,” Nuriyev said.

“If the collateral is not liquid, the volume of the regained loan is lower, of course. One should keep in mind that a trial proceeding over non-payment of a loan and the execution of a court’s decision take up to five years. For this period banks lose 75 percent of the profit from the loan. Currently, 280,000 cases are in trial proceedings, and 500,000 cases are awaiting execution of court decisions.”

ABA talks on toxic assets of Azerbaijani banks

Removing toxic assets from the balance sheets of Azerbaijani banks is impossible without the participation and support of the state, Head of Azerbaijan Banks Association (ABA) Zakir Nuriyev said.

“There are various mechanisms for removing toxic assets from the balance sheets of commercial banks in different countries,” Nuriyev said. “It is also possible to use one of these mechanisms in Azerbaijan, but all of them require the participation of the Central Bank of Azerbaijan.”

He noted that post-devaluation processes, as well as Azerbaijan’s transition to non-oil economy are the main reasons for the growth of toxic assets in the balance sheets of the country’s banks.

“Over the past seven years, the banking sector, without taking into account the International Bank of Azerbaijan, has issued loans worth over 75 billion manats to the economy,” Nuriyev said. “The major part of this sum was returned to banks, and currently, their loan portfolio is slightly more than 15 billion manats. Some 1.5 billion manats of this amount account for problem loans. Considering these figures, it is clearly necessary to remove these toxic assets from the banks’ balance sheets or to use a mechanism of state support for the removal of these funds.”

“There are several effective mechanisms, and now it is necessary to discuss them with the Financial Market Supervisory Authority of Azerbaijan and the country’s Central Bank,” he added. “This will take time, but we must use these mechanisms so that banks can again actively lend to the Azerbaijani economy.”

Caspian region has tremendous potential to supply Europe with gas and LNG

The Caspian region has tremendous potential to supply Europe with additional pipeline gas supplies and LNG, believes Claudio Steuer, Director of SyEnergy, a UK energy consultant focused on strategy and commercial matters involving natural gas and LNG value chains.

He noted that a world scale LNG plant could be developed for Caspian gas supplies to Europe, for example, in the existing oil terminal of Ceyhan in close cooperation with Turkey.

“As a matter of fact, Azerbaijan’s political and economic leadership in the Caspian region can significantly game change the fortunes of the country and that of Turkmenistan and Kazakhstan, by developing a Marine CNG link, creating a de facto Caspian Gas Hub in Baku – and enabling greater gas exports via pipeline and the development of an LNG export project,” Steuer told Trend.

He noted that all the essential building blocks for development of the Caspian Gas Hub are in place - Azerbaijan has sufficient gas reserves, the support of the European Union to continue to provide diversity of supply and route to member states, and a strategic relationship with Turkey to progress with the first LNG train de-risking further expansions of the larger project.

“Once the first phase of the project becomes real, it will be much easier to link up Azerbaijan with Turkmenistan and Kazakhstan via marine CNG bypassing decades long of geopolitical opposition from Russia and Iran, interested in pushing ahead with their own natural gas and LNG monetization projects and securing valuable gas markets ahead of Azerbaijan, Turkmenistan and Kazakhstan,” Steuer said.

According to the expert, besides additional natural gas and potential LNG supplies from the Caspian Region, Europe stands to benefit significantly from the massive gas finds in the Eastern Mediterranean countries of Egypt, Israel and Cyprus. He noted that once those countries agree on the development projects to supply the domestic and export markets, Europe should have additional options to receive natural gas supplies via pipeline, marine CNG and LNG.

“Caspian countries need to organize themselves with a sense of urgency if they are going to benefit from this limited “window of opportunity” and diversify the markets for their natural gas resources beyond Russia and China,” Steuer said.

The consultant noted that it is of strategic importance for Azerbaijan to capitalize in the current economic ineffectiveness of US LNG supply into Europe, and the West rapprochement efforts with Iran.

“It is hard to imagine a better timing for Azerbaijan to launch a bold energy vision for the next 20 years to unleash sustainable growth and place the Caspian Region in the appropriate energy leadership position commensurate with the collective natural gas reserves held. Failure to launch such bold energy initiative means accepting that a significant portion of the gas reserves will remain undeveloped or will be sub optimally commercialized serving Russian and Chinese interests,” he said.

Expert: Further rise in prices in Baku’s real estate market inevitable

Further rise in prices in Baku’s real estate market is inevitable, Nusret Ibrahimov, director general of the MBA Group consulting company, real estate expert, said.

“At present, the process of stabilization is underway in the market,” he said, adding that insignificant price fluctuations testify to it.

"Thus, the process of stabilization is accompanied by price fluctuations in the real estate market,” Ibrahimov added. “If there is a growth in the market for several months in a row, then there may be a slight decrease one or two months.”

“A similar situation was observed here,” he said. “After the prices increased in the market for several months (real estate prices increased by 0.56 percent since early 2017 and by 1.37 percent in May), prices decreased by 0.59 percent in June. This is normal and it shows that the market is gradually stabilized and further growth is inevitable."

Ibrahimov added that a number of factors have a positive effect on the stabilization of the situation in the market.

The market revived after a sharp decline in prices in 2016 due to these factors (the Baku real estate market decreased by 31.53 percent in 2016).

"Such factors as the construction of social housing, the restoration of the activity of the Azerbaijan Mortgage Fund, the implementation of a number of state projects and the restoration of bank lending positively affected the stabilization of prices in the market,” he said. “The prices began to increase again due to these factors and prices have already increased by 0.56 percent since early 2017.”

Earlier, Ibrahimov said that the prices in the real estate market can increase by ten percent in 2017.

The gradual adaptation of the population to the current situation can also contribute to it.