Positive on the background of negative in drop in usd rates

Analysis Materials 10 April 2007 20:04 (UTC +04:00)

Over the last time, drop is observed in prices of dollar at world stock exchanges. Many forecasts testify that a tendency on decrease of USD rates will continue increasing. According to last data, in March 2007 the Baku Interbank Stock Exchange (BICEX) rate of Azerbaijani manat in respect dollar increased 0.2% from 0,8688 AZN per USD to 0,8671 AZN per $1. As a result, in March the average sustained exchange rate of the national currency with respect to dollar was 0,8679 AZN per $1, whereas in February this figure was 0,8697 AZN per $1. Over the last year, the exchange rate of manat with respect to dollar increased 4.62%.

Fall in USD rates are caused by different reasons. One of them is speculation around probability of US attacks on Iran. If war is broken out in Iran, it is sure to lead to sharp increase of non production expenses by the United States, and consequently give birth to inflation and further cut in USD rates with respect to other currencies. It is necessary to note that not the war, the expectations for it affect the rates and it is probable to cause drop in rates.

Drop in USD rates in Azerbaijan means rise in the rates of manats and the process is probable to have a negative impact on the state of economy. Rise in manat will cause inflow of foreign capital, cash currency and of course, additional inflation pressures. The process on drop in rates of USD with respect to AZN is a negative factor for the production as well. At the same time it negatively impacts on export. Azerbaijani producers will feel constant pressures on competitive ability. It actually benefits the companies, which are involved in import of goods products manufactured abroad. However, measures taken for the consolidation of manat might lead to closing down of enterprises, involved exporting goods abroad and unemployment.

Devaluation of dollar will affect on other markets. Thus, demand for metal (including precious metal, crude oil, raw agriculture products, which is traded in dollars, will increase due to drop in USD. Price of oil in euro or pounds, will drop even of oil increases in dollars. It is one of reasons for rehabilitation of rise in gold, silver and oil prices over the last period.

Experts note that two manifestations - drop in dollar and rise in oil prices are interrelated indirectly, of course, through Iran. Possibility of armed attacks on Iran gives birth to inflation expectations from rise in non-production expenses by the United States and simultaneously affect on oil prices, defined by futures deals. So, deals are done today, but for further period. The futures deals are rather dependant on efficiency of the expected developments. So, the deals on oil take into consideration world expectations around the oil producing countries. Therefore, expectations on US armed attacks against Iran have direct impact on increase of oil prices.

Dollar is one of hard currencies throughout the world. Fall in its rate certainly influences on world prices. However, rise in oil prices is not a direct result of drop in dollar rates. Future increase of prices of 'black gold' is linked with exhausting, but not unrecoverable energy sources. So, rise in demand in oil and drop in its reserves actually cause rise in oil prices. Therefore, increase of oil prices is a long-term tendency. Unless global changes occur in energy production technologies, oil prices will continue increasing.

Drop in USD rates cannot affect on Azerbaijan's currency reserves, because these reserves are kept in euro and dollar. Furthermore, major part of reserves is kept in other currencies. When a country keeps its currency reserves not in one currency but in several, it cuts the possibility of benefiting on exchange rates.

At the same time, there is a probability of loss as a result of sharp drop of dollar. Thus, losing in dollar we actually win in euro, because dollar falls in respect to euro.

The banks' depositors are both physical and legal persons were also adapted in this situation. People's interests were accompanied with an increase of confidence in the national currency. Special weight of savings and deposits reduced by 17.9% in foreign currency in the general structure of the deposit portfolio in 2007. These processes are characterized by the consolidation of rate of manat with respect to the hard currency and as of 1 March 2007, urgent deposits and savings rose 5 times, while long-term savings by 4.4 times. The manat cash money (М0) increased 2.7 times and respectively, special weight f М0 in money mass dropped from 69.1% at the beginning of the year to 61.9%.

According to the National Bank of Azerbaijan, as of 1 March As of 1 March 2007 the banks raised 2,656mln manats (including 1,308mln AZN in national currency and 1347.5mln in hard currency) against 2493.4mln manats (including 1,203mln manats in national currency and 1290.4mln AZN in hard currency) as 1 February 2007 and 2,362,7mln manats in credits (including 1,170,5mln manats in national currency and 1,192,2mln manats in hard currency) as of 1 January 2007.

Overdue credits and loans comprised 130.1mln manats against 104.1mln manats as of 1 February 2007.

According to experts, the consolidation of manat will continue. Meanwhile, additional consolidation of the national currency at the present favors the government. Major part of country's debts is in dollars and therefore, cut in the cost of currency cuts the sum of debts in this proportion.