Azerbaijan's oil fund to invest 5% of assets in junk-rated local banks

By bne IntelliNews October 13, 2016

Azerbaijan's sovereign wealth fund Sofaz will be able to invest up to 5% of its assets in local banks, Sofaz's executive director Shahmar Movsumov said on October 12, according to The fund has already invested AZN1bn (€563.7mn) in the country's largest lender, the troubled International Bank of Azerbaijan (IBA), and could invest another AZN600mn, although it has no plans to do so at the moment, Movsumov added.

Sofaz has invested most of its $34bn assets in MSCI-approved equity in Europe, North America, and Asia, with less than 10% of assets invested in riskier opportunities such as real estate and foreign exchange (forex). That the rainy day fund, which complies with strict investment criteria in order to minimise risk, would be brought in as a possible investor in the troubled banking sector, which has been plagued by low capitalisation and asset quality, speaks to the extent of the problems in the sector. 

Perhaps in an effort to protect lenders, Baku has not been forthcoming about the full extent of the problems in the banking sector. Azerbaijan's banks have been hit by lower oil prices, which sent the economy into recession this year, and a double devaluation of the Azerbaijani manat in 2015, which eroded banks' asset quality and sent non-performing loans skyrocketing. Authorities have revoked the licences of 11 lenders so far this year, leaving 32 banks operating in the sector. A third of them are said to have critically low capitalisation. International observers like ratings agency Fitch expect Baku to be able to handle a banking crisis, given the sector's relatively small size of less than 50% of GDP and the country's sizeable savings, which represent two thirds of this year's GDP forecast. 

Sofaz would theoretically be able to single-handedly rescue the entire sector, as its assets slightly exceed total banking assets in Azerbaijan. Nevertheless, the liquidity of the fund's assets has been raised into question, as Baku has chosen to borrow internationally to finance some of its key infrastructure projects instead of borrowing from Sofaz earlier this year.

Sofaz has nevertheless been essential in maintaining the stability of the manat, having spent some $2bn since January on biweekly currency auctions that would satisfy lenders' foreign exchange (forex) needs and quell pressure on the manat prompted by forex shortages.

Movsumov added that he expects the fund to close the year with assets of $34bn, up from $33.5bn in January but down from $35.8bn at end-September, and to see a $1bn increase in assets in 2017.

One of Sofaz's most controversial assets - a 2.9% share in Russia's state-owned lender VTB - has reportedly generated $25mn in dividends so far in 2016. Movsumov said that, even if the Kremlin decided to privatise part of its share in the bank - Sofaz would not increase its share in the bank. VTB Bank's privatisation was initially slated for this year, but later postponed.

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