Will Azerbaijani National Currency be re-depreciated in 2015?

Will Azerbaijani National Currency be re-depreciated in 2015?

The future of the Azerbaijani national currency is the hot topic in the existing agenda. Although Central Bank of Azerbaijan (CBA) announced on April 02, 2015 that no sudden changes in the currency policy are expected since the oil prices will be likely remain at the level of $50-55 per barrel until the end of the year: “It’s unlikely that the manat, Azerbaijan’s national currency, exchange rate will suddenly fall this year, as such process is connected with the oil prices at the world market”. However, CBA warns about possibility of the next devaluation of the national currency: “CBA doesn’t exclude possibility of further devaluation of the manat, which can happen in case of violent fluctuations in the global energy resources market”.

As for the situation in the financial market due to devaluation of the national currency, CBA has announced that the dollarization process is now active in the country and it will slow down in April-May, 2015: “The transfer to the floating exchange rate of the manat is not possible at the moment, as the manat can demonstrate sudden surge if interventions are stopped. Over a day the exchange rate of the national currency can be changed by 20% and more, which will take negative effect the economic relations in the country”. “Dollarization cost $1 billion US since the national currency was devaluated”, – concluded CBA.

CESD experts has pointed out that due to the decline of its currency reserves CBA still firmly considers re-devaluation of the manat as one of possible options: “Caused by oil price decline in the world market, Central Bank’s intervention costs have increased since August 2014 in Azerbaijan. Due to intervention costs, CBAR lost its currency reserves only by 8.0 % only during January, the first month of 2015. CBA currency reserves haven declined to $ 11, 766 billion US by February 01, 2015. CBA spent extra $ 1,676 billion US in February and Central Bank’s currency reserves declined by 13.2 % only this month. CBA intervention continued in March 2015 too and Central Bank lost additional $ 1,0 billion US in March, 2015. CBA’s currency reserves have decreased by around $ 6.0 billion US since oil price has dropped. Low oil price will push the CBAR to extend local currency sterilization in up-coming months of 2015”.

The question, again is whether the manat will be re-devaluated again in the light of losing of the country’s currency reserves?

According to the CESD experts, there is a need to look at the various scenarios. The optimist scenario is related to the raising of the oil price in the world market. If the price of oil in the world market raises, strengthen national currency rate will be observed in the second half of 2015. Of course, the strengthening of the national currency in this case, does not mean that the manat will be appreciated to the previous rate. If oil price increases to $ 90-100 US per barrel then the manat would appreciated to 1 dollar= 0.95 manat ratio. However, CESD accepts that this scenario is less realistic one. The second scenario is based on oil prices of $ 55-60 per barrel which matches to the current situation. In this case, the central bank will try to change the exchange rate within the corridor by the fall, 2015. The CBA’s corridor is about 5.0 %. This means that the change in the range of 1 cent to $ 1,0 equals 1.04-1.10 manat. This is a intermediate scenario. Pessimistic scenario is that the price of oil in the world market has fallen below $ 40 US per barrel. The Central Bank has announced that this is a cutoff line since the country’s balance of payments would have a deficit instead of surpluses in this case. If the world market price of oil falls below $ 40 US per barrel, then more currency will leave the country rather than received. In this case, it is inevitable devaluation of the manat. At that point, the manat will be re-devaluated by around 30.0 % by the end of 2015.

In his words, the national currency’s future directly depends on crude oil price in the world market. News from the stock exchange are still pessimistic.

© CESD, 2015

For more detail research, please contact to the CESD Research Group at info@cesd.az

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