New currency crisis in Azerbaijan

New currency crisis in Azerbaijan

Azerbaijani banks completely halted foreign-currency sales as demand by businesses and households soared and the manat continued to depreciate against the dollar. Central Bank of Azerbaijan depreciated local currency against the dollar by almost 7 % in the last month. The official rate of the manat was depreciated against the dollar to 1.7039 on November 15th, 2016 from 1.5969 on October 18th 2016. Meanwhile, the manat’s rate against dollar in the “black market” was recorded the highest one in 2016 since buyers pay 1.82 manat for 1 dollar. The manat has lost its values against all major currencies almost every day since the mid October.

Reminded here, Vugar Bayramov, the chairman of CESD, forecasted the manat shortage in his interview with the Bloomberg’s journalist 2 months ago (more information is available at: http://www.bloomberg.com/news/articles/2016-09-29/currency-rescue-proves-political-cure-all-for-azeris-before-vote ). CESD experts again forecast that the demand for a foreign currencies will increased by the end of 2016.

In spite of the fact, State Oil Company of Azerbaijan (SOFAZ) sold $ 4 billion US in the first nine months of 2016, the fund has not spent all volume of the manat purchased in the currency auctions. According to the Central Bank of Azerbaijan (CBA) official calculations, the average rate of the manat against to the dollar was 1,5663 in the first nine months of 2016. It means, SOFAZ purchased approximately 6,2562 billion manat. However, the SOFAZ’s expenditures constituted 3,823 billion manat (http://www.oilfund.az/en_US/hesabat-arxivi/rublukh/2016_1/2016_1_3/#sthash.OukL6phY.dpuf) As per 2016 budget of the Fund, 3 260 billion. manat were transferred to the state budget. The expenditures in the amount of 73.8 mln. manat were directed to financing the improvement of social-economic condition of refugees and internally displaced persons, 39.1 mln. manat were used for financing the reconstruction of the Samur-Absheron irrigation system. 48.6 mln. manat were directed to financing Baku-Tbilisi-Kars railway construction and 20.8 mln. manat were directed to financing “The state program on the education of Azerbaijan youth abroad in the years 2007-2015”. 241.9 mln. manat were directed to financing the “Southern Gas Corridor” project and 127.0 million manat for financing of the share of the Republic of Azerbaijan in the construction of “STAR” Oil Refinery Complex. The Fund’s administrative and operational expenses for the reporting period were 11.9 mln. manat. It means SOFAZ still keeps 2.4332 billion manat cash only in the result of participation at the auctions in the first nine months of 2016. In this case, SOFAZ may have less demand in December 2016 which directly affect on the currency market with foreign currency supply shortage.

In the meantime, due to bankruptcy of 10 commercial banks in 2016, Azerbaijan Deposit Insurance Fund paid more than 643 million manat . More than 360 million manat was paid to depositors of “Bank Standard” in October 2016. CESD monitoring shows that the almost of all amount of manat was compensated by Azerbaijan Deposit Insurance Fund was converted to the dollar by receivers in the short period which increases demand to foreign currency. For almost all households, keeping money in a foreign currency is only option now since investments to traditional sources such as property, gold are not attractive in Azerbaijan at all.  Psychological demand for the dollar by households and business has been increasing in Azerbaijan in October 2106 due to concerns on new devaluations risks. Household keeps even small amounts in the dollar which increases the manat supply in the market. There are concerns on new bankruptcy wave of some other commercial banks in Azerbaijan. One of leading banks in Azerbaijan faces big liquid problem starting October 2016 and it is expected that Azerbaijan Finance Market Supervision Chamber will announce this bank as a bankrupt in very near future since the bank is not in position even to pay small amount of deposits back now. It results more massive withdraw deposits from the banks and it increase demand for the dollar. Because of taking the manat deposits from the banks, the manat supply in the market thas been extended.

The decrease of currency reserves to a critical level has limited the intervention options of the Central Bank. As a result, the foreign currency demand has not been fully met, which has increased pressure on the national currency in last three months. Central Bank of Azerbaijan spent more than 75.0 % in the last 2 years and the currency fallen to $ 4.1 billion US. During the period of March – September 2016, the Central Bank two times made an intervention of USD 100 million. During the year the overall intervention amounted to USD 835 million but the Central Bank conducted a currency sale of USD 8.4 billion in 2015.

Dollar demand is expected to rise sharply by the end of the year because of an increase in import. Banks, government agencies will need dollars to repay their foreign debt. I expect pressure to increase on the manat at year-end. The central bank’s foreign-currency reserves are down to the psychological barrier of $4 billion. State Oil Fund of Azerbaijan Republic will also complete its transfers to the state budget by mid-December 2016. If there is no high intervention by the CBA, the
manat is expected to depreciate against to the dollar by even 2.0 in the market by the end of 2016.

Reminded here that since the second half of 2014, due to the fall of oil prices in the world markets there is a visible pressure on the national currency ‘Manat’. Overall, the Azerbaijani “Manat” lost 49.6% of its value in 2015 and in addition, a depreciation of more than 3% in the first 8 months of 2016, the losses could reach 52.2%.

© CESD, 2016

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