Azerbaijan’s manat stands strong in face of storms?

Azerbaijan’s manat stands strong in face of storms?

Recently the most frequently asked question is how long manat will continue to appreciate. While at the beginning of 2016 the exchange rate of manat was 1.5610, national currency saw its value to increase to 1.4906 on the last day of May. That is to say, manat losing its value by 48% following second devaluation, was able to appreciate by 4% during last 5 months. This appreciation rate is lower relative to encountered devaluation, and what is more, the role of market in this appreciation is important. Before answering the question, we need to analyze the underlying reasons for the appreciation of manat starting from March. Following the second devaluation, citizens and businesses tried to exchange their manats for dollars during short-term period. Consequently, the dollarization process accelerated, and both the savings of people and banks were subject to this dollarization. During the period, the exchange rate of manat in “black market” increased to 1.90. In other words, the dollarization process brought about significantly weaker manat, which thereby increased the costs for businesses and citizens in purchase of dollars. But, starting from March, both citizens and banks exchanged their dollars for manats to finance their current expenditures. Reduced investment spending in budget resulted in similar decline in imports. Additionally, the restrictions applied to consumption credits by banks further decreased the demand for dollars. As a final point, reducing manat base to 6.726 billion manats in May 2016, from 11.542 billion manats in January 2015 limited the supply of manat. Consequently, the demand for dollars fell owing to the start of de-dollarization process and administrative measures implemented by the Central Bank and Financial Market Supervision Chamber. The participation of the Central Bank as purchaser in auctions affected the exchange rate of manat. The Central Bank trying to maintain 4% margin, still remains as a leading actor in exchange markets. That is to say, the exchange rate of manat is determined by the Central Bank at least as much as by exchange markets. Even so, the appreciation of dollar in world markets has negligible effect on national currency. Unless the exchange rate is determined by market and liberal floating exchange rate regime is restored, the uncertainty about the future exchange rate of manat will persist. Apparently, the administrative measures implemented by the Central Bank are not effective in the long-term. In case of rising imports the demand for dollars will again increase. On the other hand, considering “hot money” is one of the main drivers of real sector, the Central Bank is likely to be forced to increase the manat base, which will eventually result in growing demand for foreign currency.

Thus, the future of manat can be concluded as following: national currency could not strengthen in the long term given current economic conditions (1);the administrative methods implemented by the Central Bank have only short term benefits (2); the demand for foreign currency can increase as a result of expanding imports, driven by revived real sector and improved purchasing power (3) since energy products comprise 85% of total exports, the future exchange rate of manat depends on world oil prices. The pessimist scenario for the exchange rate of manat is oil priced at lower than 40 dollars per barrel, realist scenario priced at 60 dollars per barrel, and optimist scenario at higher than 80 dollars. However complicated to make prediction on oil price, given there are no external interventions, the price of oil can stabilize around 50 dollars (4); based on our discussions and meetings, after the completion of new road map related to the improvement of non-oil sector, there will be an increase in manat base. The expanded manat base is not only essential for improving real sector, but also will increase the demand for foreign currency, which will result in appreciated dollars (5); If the FED increases the discount rate in the next month, it will create a psychological pressure on manat, and in the background of fading administrative measures dollar is expected to restore its value once again in the country (6); finally, sooner or later the Central Bank will switch to liberal floating exchange rate regime, and in this case exchange markets will be decisive in determining the exchange rate of manat.

© CESD, 2016

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