On a Friday afternoon in mid-February Elman Rustamov told the FT: “You have come to a hot kitchen. Everything is burning.”
That weekend, Azerbaijan’s central bank governor put an end to the dollar peg for the manat that had held since mid-2011. A week later, after an abortive attempt to manage a gradual weakening of the currency, the central bank shocked the nation by announcing a new manat-dollar exchange rate 34 per cent weaker than before.
Vahid Ahmadov, an MP and member of the parliamentary economic policy committee, railed that the central bank had “deceived us, the deputies, and the whole people of Azerbaijan”.
The pressure had been building on Mr Rustamov for months, as oil prices tumbled by more than 50 per cent from their summer 2014 peak, and the currencies of neighbouring countries, such as the Russian rouble, Georgian lari and Turkish lira, suffered sharp falls.
Right up until the new exchange rate was announced on February 21, Azerbaijani politicians insisted that Baku would not undertake a big devaluation, with President Ilham Aliyev telling parliament in January that the stability of the manat “demonstrates the success of our economic policy”.
Indeed, a stunned Azerbaijani population queued for hours at exchange points in the wake of the devaluation, while Moody’s warned that the move would “pressure banks’ asset quality”.
That the Azerbaijani central bank could no longer maintain the stability of the currency underlines the extent to which the slide in oil prices has upended the government’s economic plans.
The cause for the move was a large-scale flight from the manat by local depositors. Mr Rustamov said ahead of the devaluation that the central bank had spent about $1bn in a month defending the peg, as savers shifted money into dollars. The proportion of deposits held in dollars had risen 4-5 percentage points in the first six weeks of the year to 40 per cent, he said.
In the week ahead of the devaluation, depositors were buying $500m a day, according to president Aliyev.
More broadly, the fall in oil prices has put a heavy strain on government finances. Oil and gas account for 95 per cent of Azerbaijan’s exports, 75 per cent of its government revenues, and 40 per cent of its GDP.
Mr Rustamov said that if oil prices averaged $50 a barrel, the balance of payments surplus would be five times smaller than last year’s level of $10bn-$11bn. Moreover, at an oil price of $50 a barrel, the revenues of Sofaz, the state oil fund which receives the earnings from the government’s energy sector stakes, would fall from last year’s $16.3bn to just $4.7bn, according to Gubad Ibadoglu, an independent economist who heads Baku’s Economic Research Centre, a think-tank.
Those falling revenues have created a problem for the government, whose 2015 budget, drawn up under an assumption of $90-a-barrel, envisaged Sofaz would this year fund just over half the budget revenues, spending a total of 11.8bn manat — worth $15.1bn before the devaluation and $11.2bn after it.
In theory, this kind of countercyclical spending was just what the state oil fund was set up to do.
“During the good times, we’ve accumulated quite significant reserves,” says Shahmar Movsumov, chief executive of Sofaz. “This is the first year we will probably see some drawdowns from the fund. This is exactly the role of the fund. We’re testing the concept.”
However, he added that the oil fund will most probably spend less than 10 per cent of its $37bn reserves.
Even before the devaluation, the government was taking steps to shore up its revenues, implementing a highly unpopular tax on deposit income from January, as well as other levies on imports of luxury goods such as cars and yachts. Executives say it is also taking informal steps, such as delaying tax refunds, to boost its resources.
Mr Ibadoglu says that falling oil revenues have prompted state-owned companies to cut jobs.
“The economic and social situation is getting worse by the day. The government didn’t have any alternative” but to devalue.
International agencies, such as the European Bank for Reconstruction and Development, are predicting a slowdown in growth to 1.5 per cent, from 2.8 per cent in 2014. But even that may be optimistic. “If we get to the end of the year in positive growth for GDP, I would classify that as a success,” says Neil McKain, head of the EBRD’s Baku office.- reported http://www.ft.com.
