THE GLOBAL CRISIS AND FINANCIAL STABILITY IN AZERBAIJAN

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THE GLOBAL CRISIS AND FINANCIAL STABILITY IN
AZERBAIJAN
NATIONAL BANK OF AZERBAIJAN KHAGANI ABDULLAYEV,
EXECUTIVE DIRECTOR
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Contents

1. Recent Macroeconomic Developments
2. The Global Crisis and the Banking System
3. Prudential Regulation and the Monetary Policy
4. Policies for 2009

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1. Recent Macroeconomic Developments

• High economic growth has been driven by the oil
  industry expansion and active fiscal policy

1. The average annual growth rate stood at 24 in
   2004-2007
2. Rising public expenditures (investments) has been
   the main force behind booming non-tradable
   activities. Up to 75 of new jobs have been
   concentrated in the non-tradable sector.

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1. Recent Macroeconomic Developments

• Given the large scale use of the oil revenues,
  the money supply almost tripled in 2006-2008

1. The non - oil GDP monetization reached almost
   40
2. Aggregate demand expansion has been followed by
   rising inflation, while the real income growth
   staying positive (10-15)
3. Declining real interest rates stimulated
   consumer credit boom.

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1. Recent Macroeconomic Developments

• The current account surplus reached 40 of GDP.
  Given the growing demand for credit, banks
  increased external sources of borrowing

1. The ratio of loans to individuals to consumption
   expenditures increased from 3 to 22 in
   2001-2007
2. Banks loan portfolio increased 5 times in
   2004-07.
3. 2/3 of the loan portfolio has been concentrated
   in the non-tradable activities
4. Ratio of bank assets to the non-oil GDP
   approached 60

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1. Recent Macroeconomic Developments Growth
Stabilization in 2008

• As the oil extraction approached its peak level,
  the growth of the industry started stabilizing,
  inflation rate showed signs of declining

2007 2008
GDP growth rate, 26,8 12.7
oil GDP 36.8 10.5
non-oil GDP 11.4 15.4
Headline Inflation 19.6 15.4
Real Estate Prices 45 5
Monetary base growth rate 101 48.5
Credits growth rate 98.2 46

1. With the world financial crisis turning into
   global recession, Azerbaijan was not under its
   heavy impact
2. Inflation did not grow as high as in 2007 due to
   1) falling commodity prices at the world markets
   2) the Nominal Effective Exchange rate
   appreciation at more than 12 (AZN is pegged to
   basket)
3. The money supply growth has been twice lower than
   in 2007, but the non-oil GDP continued growing at
   two digit level as a result of sufficient fiscal
   stimulus to economy

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1. Recent Macroeconomic Developments Global
Crisis, External and Fiscal Sustainability

• Strategic foreign exchange reserves (State Oil
  Fund, Central Bank and Treasury) of Azerbaijan -
  18.1 bln. USD
• 1. Reserves/ gross foreign debt ratio
  200
• 2. In months of the non-oil imports of
  goods and services 27 months
• International Investment Position, net claims 13
  bln. USD
• Share of banks external liabilities in total
  liabilities 25
• Forecast for the State Oil Fund reserves with the
  oil prices of 30 per barrel, in percent of GDP
  (transfers to state budget excluded)

2009 2010 2011 2012
14 13 11 9
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2. The Global Crisis and the Banking System
Banks reaction to global crisis was quite
rational over 1 bln. USD out of outstanding
foreign debt was paid back. In addition, under
psychological impact of global crisis and prudent
risk management policies of the central bank,
banks switched to conservative credit policies .
The growth rate of credits moderated
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2. The Global Crisis and the Banking System

1. Because of squeezing schedules on the foreign
   debt service, banks accumulated enough liquid
   assets as a precautionary step to safeguard
   against any unexpected events
2. Ratio of liquid assets to the foreign debt stock
   is 99, while its ratio to total assets is 21

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3. Prudential Regulation and the Monetary Policy
Main Steps in 2008

• PRUDENTIAL REGULATION
• 1. Strict Provisioning Policy and Tight Lending
  Standards
• increased risk classification of assets
• increased LTV (from 120 to 150)
• 2. Risk Management requirements - private action
  plans on individual banks
• MONETARY POLICY
• Reduction of the main refinancing rate from 15
  to 8
• Reduced required reserves from 12 to 6
• Abolition of a 5 reserve requirement on external
  borrowing
• The resulting impact liquidity injection
  equivalent to 10 of the monetary base

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3. Prudential Regulation and the Monetary
PolicyPolicy Results
Main policy outcome in 2008 Stability, High
Liquidity, Adequate Portfolio Quality
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4. Policies for 2009

• Risks in 2009
• Uncertain oil prices and global demand
• Decline in investment flows around the globe
• Impact of crisis in neighbors (Russian
  Federation ruble depreciation, falling money
  remittances etc.)
• Main Policy Task
• Smoothing the impact of global crisis on domestic
  economy and prevention of the sharp demand
• contraction
• Supporting Policy of the National Bank of
  Azerbaijan
• Sound Prudential Policy (strengthening the
  capital position, maintaining adequate level of
  the asset quality , liquidity and risk
  management)
• Liquidity Support to banks through activating
  the refinancing facilities
• Allow for More Exchange Rate Flexibility to
  Absorb External Shocks and to Focus More on
  Liquidity, Demand Management and Inflation
  Targets
• Confidence measures Central Banks guarantee on
  lending at the interbank money market and further
  increase of the deposit cell covered under the
  current deposit insurance scheme

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