Azerbaijan's economy emerges out of risk areas
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Azerbaijan's economy, driven by its energy sector, has emerged out of the “risk zones” galvanized by the current price of oil in world markets, according to Azerbaijani Central Bank President Elman Rustamov.
“With oil prices at $ 40 per barrel, the trade balance of Azerbaijan will be deficit-free, and therefore we are not afraid of this level. The balance of payments of Azerbaijan by the end of the year is expected with a surplus at an average current price of oil," Rustamov said in an interview with state news channel AzTV.
Rustamov refrained, however, from giving forecasts for oil prices, stating that it would be wrong to do so since the world economy has very unpredictable factors. "On the other hand, it’s unknown how our trading partners [will behave] in the future. Each country has its own problems in the economy. However, the observed trend is that the negative processes in the currency markets [have] halted," he said.
Oil and gas account for 95 per cent of Azerbaijan’s exports, 60 per cent of its government revenues, and 30 per cent of its GDP.
Oil advanced from a three-month low as investors weighed falling nationwide stockpiles in the U.S. against the backdrop of swelling supplies at the country’s biggest storage hub.
Futures rose as much as 1.3 percent in New York. For August settlement, which expires Thursday, Brent was 50 cents higher at $57.55 a barrel on the London-based ICE Futures Europe exchange. It fell $1.46 to $57.05 on Wednesday. The European benchmark crude was at a premium of $5.77 to WTI. The more active September contract rose 54 cents to $57.66, Bloomberg reports.
The full impact of higher Iranian exports won’t be felt until 2016 when the nuclear deal is implemented, banks including Goldman Sachs Group Inc. predict.
Rustamov further spoke about the country’s export ties, adding, “We have free trade with all countries, but also world countries have free trade with us. The world economy is based on the relationship of supply and demand. We compete with our trading partners, and this competition has its peculiar sides, one of them – the value of the national currency."
Significant changes and adjustments are expected in the structure of imports due to the fact that the CBA had abandoned a peg between its currency, the manat, and the USD, he said.
A new manat-dollar exchange rate is 34 per cent weaker than before.
"We see growth in exports of non-oil sector and domestic demand covers its own products, i.e. increasing the competitiveness of our products. In such circumstances, the foreign trade balance of the country by the end of the year will be balanced,” he noted.
Future of the manat
The manat rate will not face any problems by late 2015 and also in the medium term, should the average price of oil be kept at $50 and the economies of Azerbaijan’s trading partners remain stable, Rustamov said.
Noting that there is no need for concern that these basic conditions are kept, he added, “I do not see any problems with the rate of the manat [until] the end of the year and in the medium term. I openly and objectively expressed the position of the CBA, and all other forecasts are nothing more than speculations.”
The rate of the manat is more dependent on external factors than internal ones, according to Rustamov. “The devaluation of the manat [in February 2015] was a response to the ongoing processes in the world. The strong fall in oil prices and the expected changes in the balance of payments of Azerbaijan forced us to take this step. Our trading partners also experienced a process of serious devaluation. This created a problem for the competitiveness of our products, both in the domestic as well as for non-oil exports to foreign markets. Also, for the long-term sustainability of the Azerbaijani economy, this step was inevitable in terms of microeconomic competitiveness. And the current situation shows that no matter how difficult and unpopular a step it was, this was necessary for future economic recovery,” he said.
Rustamov said following the devaluation, the country has gained very important trade benefits and the competitiveness of Azerbaijani products have increased. “We have witnessed the miracles of development. The main element of these miracles is the low rate, low tax burden, and low interest rates. In general, in terms of microeconomics, all three elements create a real advantage for the national economy. Low rate makes it competitive [and] can increase the amount of export goods in foreign markets. Low interest rates directly reduce production costs and low taxes expand investment opportunities. Therefore, from a strategic point of view, the correction of the exchange rate is a factor in the new economic model, one of the three main elements that are present in all economies, where there was a miracle,” the head of the Central Bank affirmed.
Interest on loans
Strategically, it is necessary that the interest rates on business loans decrease to one-digit level and a healthy competitive rate is maintained, which will ensure stability and optimize and simplify the tax burden.
The interest rates on loans are unfairly inflated in Azerbaijan, said Rustamov.
"If you look at the loan portfolio of banks, we can see that about 76 percent is business loans, 24 percent consumer loans. Also, if we exclude mortgage loans, the share of consumer loans in the banking book will be about 20 percent," he said.
The chief banker said worldwide interest rates on consumer loans are quite high, but there are no objective reasons for that in Azerbaijan.
“We gave the banks serious and tough regulations in this regard [to lower interest rates]. May be from the legal point of view, we don’t have grounds to do it, as the money market of Azerbaijan is very liberal. This market has millions of customers, and 43 banks with hundreds of branches operate in the country. But as President Ilham Aliyev noted, referring to drug prices, liberal does not mean that people should forget about social responsibility. We reminded the banks that they have a serious social responsibility. Maybe some parts of the population lack financial literacy, but that does not mean that someone has to abuse it,” he said, highlighting the fact that that the credit market of the country is deficient, while the population has large a demand for loans.
He also reminded citizens that the Central Bank ordered banks to reduce the service fee on consumer loans by up to one percent. "The decision to reduce the commission to one percent was perceived ambiguously by banks, some of them have tried to compensate this by raising interest rates on loans,” he said.
He added that in international practice, the service commission on consumer loans is not so high in contrast to the commission on major long-term loans.
"We hope that by the end of the year, rates will be reduced, as the monitoring has confirmed the decrease in average rates. We will continue to work with the banks to reduce the maximum rates on consumer loans, and a stable core banking system is ready to connect to the process. The activities in this direction will be implemented in stages until the end of the year. And the banks will be able to gain access to cheap resources if they meet all regulatory requirements of the Central Bank and will take place in the internal system of rating,” he said.
According to Rustamov, in terms of the expansion of mortgage lending, member-banks of Azerbaijan Mortgage Fund will have access to additional funding if they adhere to the requirements of the Central Bank.
President Aliyev instructed the relevant bodies to allocate additional funds to aid the mortgage industry from the state budget by the end of this year. " I consider that at least 200 million manats and possibly more funds should be allocated from the state budget before the end of the year.," the head of state said.
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