Weekly actual topics in Azerbaijan (April 16-20)

Analysis Materials 23 April 2018 16:56

Should we expect a change in rate of Azerbaijani manat?

The rate of Azerbaijan's national currency, the manat, has been at the level of 1.7 AZN/USD since April 2017. The manat stability is supported by recovering indicators of the economic growth, people's confidence in the manat, growing exports and other factors.

However, speculations over possible devaluation of the manat has recently resumed. So, let's take a look whether there are prerequisites for cheapening of the national currency.

Inflation and policy of the Central Bank of Azerbaijan

The main task of the Central Bank of Azerbaijan (CBA) in 2018 is to achieve lower inflation rate at 6-8 percent. The cheapening of the national currency in Azerbaijan could cause a rise in prices, that is, an increase in the inflation rate, which contradicts the CBA's policy.

CBA Chairman Elman Rustamov, commenting on the possibility of the manat devaluation, has stated that CBA would not allow a sharp cheapening or strengthening of the manat, as this could lead to a number of undesirable macro- and micro-economic risks.

CBA, according to Rustamov, has three priorities: a stable rate with low volatility, cheap currency, and low inflation.

International organizations also don't see any reason for cheapening of the manat. Particularly, Moody's analysts say that today there is no pressure on the Azerbaijani manat, and in this regard, the inflation rate will be 5-6 percent in the country in the next two years.

The monetary policy of neighboring countries or those with whom Azerbaijan has huge trade volumes can also affect the manat. Particularly, there have been concerns about the USD, the base rate of which the US Federal Reserve raised this March.

However, Head of FX Strategy/Saxo Bank John Hardy told Trend that presently the higher base rate of the USD will not have a significant influence on the rate of the Azerbaijani manat. As for the change in the euro exchange rate, this is not so important for the Azerbaijani manat as the USD or oil price, according to Hardy.

Trade balance

Export operations ensure currency inflow into the country. If the country exports more than it imports, then its trade balance remains positive, which in turn helps strengthen the national currency.

In 2017, the surplus of Azerbaijan's trade turnover amounted to $5.03 billion. That is, the export volume exceeded the import volume by over $5 billion. Today, the positive trend continues, as the trade surplus hit $1.16 billion in January-March 2018.

The additional inflow of foreign currency into the country is also ensured by the development of tourism.

In 2017, the number of tourists visiting Azerbaijan increased by 20 percent and by almost 13 percent in the first quarter of this year.

Tourists spent more than $190.9 million in Azerbaijan in January-February 2018 (an increase by 20 percent for the year). In 2017, the expenditures of foreign tourists in the country exceeded one billion manats.

In the medium term, the flow of foreign currency to Azerbaijan will be also ensured through gas projects. The country will be provided with additional billions of dollars through launching gas production within the second stage of development of the Shah Deniz field and extension of the Contract of the Century until 2050.

Public confidence in national currency

Population converts savings to foreign currency as a result of loss of confidence in the national currency. As a result, the demand for dollars, euros and other foreign currency grows and this leads to the weakening of the national currency.

According to the Central Bank of Azerbaijan, at the end of February 2018, deposits in national currency in the country's banks amounted to 2,935.2 million manats, which is two times more than in February 2017.

The share of deposits in national currency for this period increased from 20.6 percent to 37.8 percent. The share of manat deposits reached a maximum since February 2015, when the first devaluation occurred.

Thus, the population's confidence in the manat reached a three-year high. This is an important factor which stipulates that the population once again began to believe in the stability of the manat.

Oil factor

In case of Azerbaijan, oil prices play a certain role for the rate of manat. Of course, in the short term, there is no impact of oil prices on the rate of manat, but there is such dependence in the medium and long term.

However, today there are no reasons for concern. The matter rests not only in the fact that oil is currently traded at $70 per barrel, while the Azerbaijani oil has completely renewed almost a 3.5-year maximum of $74. The issue is that the base oil price in the state budget for this year is set at $45 per barrel. And this figure is lower than even the most pessimistic forecasts. Thus, the government decided to protect itself from possible risks associated with the oil factor.

The Azerbaijani economy is growing sustainably. For this year, many international financial institutions expect the country's GDP to grow by 1.5-2 percent, as well as economic growth from the next year thanks to Shah Deniz 2 and other projects. According to their forecasts, there will be a single-digit inflation in the country. Azerbaijan's exports are also steadily growing through the government's incentive measures and benefits.

All these factors give grounds to believe that for today the change in the rate of manat is improbable and groundless. So is there a reason for panic?

Azad Hasanli, head of Trend's Russian Service

No reasons for growth of foreign currency rate in Azerbaijan: NIKOIL Bank

There are no reasons for the growth of foreign currency rate in Azerbaijan, Jalal Nagiyev, adviser to the chairman of the board of Azerbaijan's NIKOIL Bank, financial expert, told Trend.

He noted that there are no fundamental prerequisites for devaluation of Azerbaijani national currency, the manat, adding that the manat's exchange rate against the US dollar has remained stable at 1.7 AZN/USD for a long time.

He said that a number of factors contribute to the manat's stability. In particular, domestic production is growing in Azerbaijan, he noted.

"In particular, more entrepreneurs, especially representatives of small and medium-sized enterprises, started to apply for business loans aimed at creating or expanding production," he said. "The measures undertaken by the Azerbaijani government - various benefits, increase of the number of industrial, IT and agricultural parks, as well as other measures also contribute to this."

Secondly, more foreign currency enters Azerbaijan as the tourism sector develops, the expert noted.

"Only in the first quarter of this year, the number of tourists visiting Azerbaijan increased by 12.5 percent compared to the same period last year. This is while the growth exceeded 20 percent last year, according to Azerbaijan's Ministry of Culture and Tourism," he said.

"In addition, one shouldn't forget about major gas projects that will provide additional inflow of foreign currency into Azerbaijan in the medium term," he added. "The Trans-Anatolian Natural Gas Pipeline (TANAP) is expected to be launched this year and, accordingly, production within the second stage of the Shah Deniz field's development is expected to start. This gas will be the base source for the Southern Gas Corridor."

The expert mentioned extension of the Contract of the Century, as part of which Azerbaijan will receive foreign investments worth tens of billions of dollars, and additional $3.6 billion as a bonus.

Among other factors the expert also mentioned oil prices.

"Oil prices remain at $70 per barrel, although many international experts were more skeptical about this," he said. "Azerbaijani oil recently renewed almost 3.5-year high, reaching $74 per barrel. These figures are much higher than the base oil price in the state budget [$45]. Therefore, it may be assumed that this year we will have no problems with budget execution. This is also a very positive factor when it comes to national currency."

The trust of the Azerbaijani population to the national currency is also quite high and continues to grow, the expert added.

He stressed that the value of deposits in national currency in Azerbaijan's banks amounted to 2.935 billion manats in February this year, which is twice more than in February 2017. The share of deposits in national currency for this year increased from 20.6 to 37.8 percent, he said.

Azerbaijan to create better conditions for fintech companies

Fintech companies are actively strengthening their positions in the financial markets. However, the application of innovative solutions requires a separate regulatory base, and sometimes even space for experiments.

The so-called "regulatory sandboxes" exist in different countries, starting from Bahrain to the UK, and within framework of them companies can experiment with new financial services in a limited environment.

Unfortunately, Azerbaijan yet lacks such "sandbox", which significantly limits possibility of appearance of fintech companies in the market.

Innovative and prospective start-ups are forced to leave Azerbaijan due to the lack of legislation.

For example, Maliyya start-up allowing p2p-lending without participation of financial institutions was forced to move to the UAE, where it was granted Innovative Technology License (ITL), a special license for fintech companies.

Nevertheless, the situation can change for the better in Azerbaijan soon.

Azerbaijan's Financial Markets Supervisory Authority (FIMSA) told Trend that favorable conditions will be created in the country for fintech companies.

This will be possible after the adoption of a law "On payment services and systems," which is being developed by FIMSA. The law is expected to expand introduction of innovative payment methods in the country.

The importance of creating satisfactory regulatory framework for fintech companies can not be overestimated. Their role in the financial sector grows yearly. In Europe, the use of fintech services allows residents to save about 7 billion euros annually, according to Azimo company.

The fintech industry will help economies of developing countries to increase GDP volume by six percent, or about $ 3.7 trillion by 2025, according to McKinsey.

Last year, investments over $27 billion were made in the fintech industry, while since 2010 the figure reached $ 100 billion.

Despite the rising investments, fintech companies can not be assessed as competitors to banks. The latter already have established sales channels, while fintech companies, instead of creating competition, can offer innovations to optimize this work and expand access to financial services.

Fintech companies and banks can be competitors in case fintech companies could find out markets for their services. However, banks themselves also develop.

The digitalization of financial services is planned to be expanded in Azerbaijan starting 2018 within the framework of the Strategic Road Maps. The International Finance Corporation (IFC) assists local banks in this through its program entitled "Electronic and Digital Financial Services". Certain progress has already been achieved in this direction. For example, in some banks, the level of customer use of mobile applications and Internet banking reaches 60-70 percent.

However, the question is whether the current banking system will be preserved in 5-10 years or it will inevitably be transformed under the impact of financial innovations?

In Europe and the United States, some bank branches perform a role of show-room, where customers can get acquainted with their services, but then customers use their services through mobile applications.

Founder and CEO of Ukraine's IDNT Company Mykola Chumak believes that in the future banks in Baku will have three or five branches. Chumak told Trend that more and more banking operations will be self-service one and performed online.

Then, bank branches will act as a bridge between the physical world and the virtual, assisting clients in understanding the new service, as well as in performing more complex operations that can not yet be carried out online.

Today, Azerbaijan lags behind other countries in the sphere of financial technologies. However, development of relevant legislation and the "Strategic Road Map on the development of financial services" allow to hope that this segment will be able to get a boost for development.

Azad Hasanli, head of Trend's Russian Service

Will Russian ruble’s decline affect Azerbaijani manat?

The recent fall of the Russian ruble will have no direct influence on Azerbaijan's national currency, the manat, John Hardy, head of forex strategy at Saxo Bank, said in an interview with Trend and Azernews.

The Russian ruble began to fall in price against the backdrop of the US sanctions announced April 6. As a result, the exchange rate of the Russian ruble against the US dollar is about 61.4 RUB/USD.

So far, the move has been small enough in the ruble to avoid direct implications for economies like Azerbaijan's, particularly because the oil price remains high, Hardy said.

Commenting on the further development of situation on the Russian currency market, Hardy said that he would be surprised to see the ruble strengthen beyond 60 versus the US dollar even if the threat of further sanctions fades.

After this recent episode and the risk of further geopolitical confrontations down the road, international money managers may be putting a discount on Russian assets that they will be slow to remove again, wanting to avoid the risk of future sanction moves, according to the expert.

"But without further sanctions or a sudden drop in oil prices, I would also say that the ruble is unlikely to weaken beyond the recent lows - so some kind of nervous 60-64 range may develop here, unlikely to affect the Azerbaijani manat," he added.

The Russian currency continues to remain in an extremely unstable position. The danger in the form of another tough package of U.S. sanctions has temporarily passed, but the ruble is still heavily dependent on geopolitical news and investors' mood.

Volatility on the Russian market has soared since Washington imposed new sanctions against Moscow on April 6, targeting major Russian companies and some of the country's businessmen.

Stable economic, political situation to remain in Azerbaijan - Israeli analyst

Azerbaijan has a stable economic and political situation that will remain in the future as well, Lev Spivak, director general of the Israel-Azerbaijan International Association, told Trend April 19.

He said that Azerbaijan is turning into a very attractive country in terms of investment, and this will contribute to the country's further economic growth in the future.

"Investors are primarily interested in stability," Spivak said. "It is important for them that there are no risks of political upheaval or economic collapse in a country. That is, there must be certain basic conditions, which guarantee safety of the investors' deposits."

Speaking about the role of Azerbaijan in ensuring the energy security of Europe, he stressed the importance of the Southern Gas Corridor project.

The expert noted that this project is extremely important for Europe, because it wants to have additional sources of energy to ensure its security in an increasingly escalating international situation.

"Today Europe depends entirely on a single gas supplier and Azerbaijan is the only country that can provide alternative energy sources for Europe," Spivak added.

The Israeli expert also noted that Azerbaijan's role in the international arena enabled the country to become a platform for discussing issues of global importance.

"Over the past fifteen years, Azerbaijan has been confidently moving along this path by organizing various forums of international level, and Azerbaijan is now a mediator in many issues in various international processes," the expert added.

Azerbaijan to be considered as reliable partner in future as well – Sobhani

Azerbaijan as a stable country will be considered as a reliable partner in the future as well, Rob Sobhani, director general of the Caspian Group Holdings, told Trend.

He noted that the future of Azerbaijan remains bright.

The political and economic stability in Azerbaijan means that foreign direct investment will find a secure place in the country, said Sobhani.

Also, in terms of foreign policy, countries will view Azerbaijan as a reliable partner due to the stability, he believes.

Sobhani expressed confidence that the government of Azerbaijan will continue to focus on growing non-oil sectors such as agriculture, tourism and small business.

He went on to add that stability means economic growth.

"As the economy grows the unemployment rates in Azerbaijan will further fall and with that poverty rates fall," said Sobhani.

In terms of the world economy, he said that energy consumers can rely on a stable, reliable partner such as Azerbaijan for energy security.

"Speaking with a strong and unified voice on the world stage is very important for any country and the reelection of President Ilham Aliyev has provided this voice to Azerbaijan in global affairs," he added.