New wave of depreciation of the Azerbaijani national currency; reasons and expectations

New wave of depreciation of the Azerbaijani national currency; reasons and expectations

Starting the mid of October 2016, the manat, Azerbaijan currency, has been depreciating against the dollar. The official rate of the manat against the dollar was 1.5969 on October 18 and it was fallen to 1.6381 on October 31, 2016. It means the manat’s official rate depreciated against the dollar by 2.5 % last 2 weeks, however, the real market price of the manat was 1.71 on October 31, 2016. Considering that market rate of the manat was 1.61 on October 18, 2016, it shows that the Azerbaijani national currency lost its value by 6.0 % in the indicated period.

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%.

What are the main reasons of the new wave of the depreciation of the manat?

 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.

 There has been a serious decrease in the trade balance of Azerbaijan. That is to say, during the period of January-August, 2016 the trade balance recorded USD 250,3 million, being 9.2 times less (2015: USD 2284,8 million, SCCAR) than the corresponding period of the previous year and 38 times less (2014: USD 8 million, SCCAR) than the 2014 level. Additionally, the trade balance recorded a deficit of 225.8 million USD in the first half of the year. According to the CESD experts, the foreign trade balance is projected to follow a negative trajectory due to decreasing agricultural exports in the following months, and low oil prices as it is unlikely that the OPEC meeting in September will decide on freezing production or setting a quota.

 The shift of the Central Bank to a floating exchange rate regime has caused the transformation of country population into participants of currency markets. As a result, new trend has emerged in currency markets. Thus, the population of the country and business entities pursue to gain profit from changes in exchange rate. Therefore, the sale of foreign currency during the appreciation of the national currency and purchase of it during the depreciation period by these groups is observed. This causes the increase in volatility of currency markets and the restriction of regulation opportunities of the Central Bank. Under current circumstances, the demand for currency by population and businesses increase continuously. As a result, the demand in recent currency auctions has reached USD 600 million . This amount exceeds the bid by 12 times. Nonetheless, the auction held in September 8, will result in an increasing currency supply by households and business for a short-term period. Increasing supply will be replaced by an increasing demand in medium- and long-term period; thereby currency sales will be replaced by currency purchases.

 The external debt growth of the Republic of Azerbaijan will increase the expenditures on debt service in next years, which, in turn, leads to an increase of state-based demand in currency markets. Such that, the external state debt peaked at USD 7.45 billion in March 2016, increasing by 14.3% in comparison with October, 2014.

At the same time, the exchange rate of the Azerbaijani Manat for the future will mainly depend on oil price, which is an external factor. Any significant increase is not predicted in oil prices for 2016 and 2017, unless there are any force majeure cases; the latter strengthens the conviction that medium-term increases will take place for USD/ Manat couple. On the other hand, CESD experts reckon there is a high probability that the government will decide upon the shift to floating exchange rate regime which can result in a 35% depreciation of the national currency once again.

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 1.95 in the market by the end of 2016.

© CESD, 2016

Leave A Comment