Azerbaijan is experiencing a severe credit crunch, which experts say could send the country into a recession.
Azerbaijan had been enjoying explosive growth in recent years, driven mainly by the rapid rise in energy export volume. [For background see the Eurasia insight archive]. As recently as October 13, during a presidential-campaign-related cabinet meeting, President Ilham Aliyev expressed confidence that Azerbaijan would not be severely impacted by the global economic crisis; he urged state-owned and privately held companies to keep on investing in ventures "both within the country and abroad."
Aliyev’s upbeat comments came just two days before he secured reelection as president. [For background see the Eurasia Insight archive]. http://www.eurasianet.org/departments/insight/articles/eav101608bf.shtml "Our state budget will continue to grow and neither the global crisis nor developments in the region will affect the government’s plans," he said.
Earlier in October, Heidar Babayev, the minister for economic development, assured the public that Azerbaijan possessed sufficient cash reserves to fend off a threat to the country’s financial system. However, his calculations were based on the belief that the price of oil would remain at or above $90 per barrel. The price has plummeted in recent weeks, standing at $62 per barrel on October 27.
Despite the ominous warning signs, Aliyev seems reluctant to acknowledge that circumstances are growing more unfavorable. During a ceremony held in connection with his October 24 inauguration for a second term, Aliyev continued to project a "steady-as-she-goes" aura for Azerbaijan’s economy. "In the coming years, we must not contend ourselves with the attained success," he said. "The country has strengthened its potential owing to the implementation of infrastructural projects and profound reforms."
Outside the halls of power, entrepreneurs and bankers are thinking in a very different way. At street level, optimism has ceded ground to realism. Since late summer, it has been difficult for individuals and small businesses to gain access to credit. And those lucky enough to obtain loans have had to pay starkly higher interest rates.
The main problem in Azerbaijan is one of excessive demand for capital. Whereas the financial systems in the United States and elsewhere have buckled because a mass of people could no longer repay their debts, only about 2.5 percent of Azerbaijani borrowers find themselves in a similar position. In Baku and other booming areas of the country, there is simply not enough cash to keep on fueling the fast pace of growth.
Anar Khanbekov, Baku-based financial analyst says that situation is linked with global financial crisis. "Until recently, Azerbaijan’s leading banks used to attract a lot of relatively cheap foreign loans. However, now foreign credits are either not available or they are much more costly, and it has created problems for many banks," he told EurasiaNet in an interview on October 26.
According to Khanbekov, several leading Azerbaijani banks are starting to experience liquidity pressure. "Of course, the situation here is yet incomparable with what is going on in the European banking market. Our banks do not face serious threat of bankruptcy. However, if the country’s banking sector showed phenomenal growth during last five years ? now we will be observing serious decline in profitability of banks," he said.
A top manager of one of Azerbaijan’s leading commercial banks told EurasiaNet that the financial institution’s customers were growing nervous about the safety of their assets. "There is not panic yet, but several clients who were not able to get credit in our bank took their money out," the bank officer admitted.
The National Bank of Azerbaijan (NBA, central bank) has taken action to reassure depositors and loan-seekers alike, issuing a statement that called speculation about a banking crisis as nothing more than "media rumors." The government has yet to see a need to develop a stabilization plan. However, Elman Rustamov, the NBA chairman, said on October 24 that officials would "provide banks with direct financial aid, if necessary."
Financial regulators had been primarily concerned in recent years with keeping inflation in check. But at present they seem intent on reestablishing a steady flow of money throughout the market. In mid October, the NBA reduced its discount lending rate from 15 percent to 12 percent, and it lowered reserve requirements for banks.
Zohrab Ismayilov, chairman of a Baku-based think tank called the Public Association for Assistance to Free Economy, says the rate cut will not be able to solve the problems facing Azerbaijani banks. "However, [the cut] will alleviate pressure on some banks, thus giving the entire financial system more confidence," Ismayilov told EurasiaNet in an October 26 interview.
Khanbekov, Ismayilov and other experts believe the credit crunch will have a severe effect on non-energy-related sectors of Azerbaijan’s economy, especially the construction sector. "Leading construction companies could face the threat of bankruptcy," Ismayilov said, adding that a collapse of the construction sector could have a disastrous cascade effect on the economy. He noted that during the January-August period this year, construction firms received roughly $560 million loans from the banks. Many of those loans look very shaky at the present time.
More broadly, the rise in living standards, which had been zooming ahead, now looks set to come to a screeching halt. Over the past three years, consumer loans had ballooned. During the first half of 2008 alone, banks issued consumer loans totaling $2.8 billion, and according to NBA statistics credit was involved in 25 percent of consumer spending.
Now with consumer goods retailers starting to feel squeezed, some have taken the unprecedented step in Azerbaijan of offering rebates. One auto dealer in Baku, for example, is offering to give $2,500 back to any customer willing to pay all-cash for a car.
If government intervention is eventually needed, the Aliyev administration may find that its options are limited by the drop in global energy prices. "The economy will not be able to develop without banking credits and demand for consumer goods will also decrease. But low oil prices will restrict the government ability to improve situation," Ismayilov said.
Editor's Note: Shahin Abbasov is a freelance correspondent based in Baku.
No comments:
Post a Comment