Demand for foreign currency has been building up in Azerbaijan, prompting fears of a sharp fall in the value of the manat that would push the enfeebled banking sector into a full-fledged crisis.
Sources in Baku have informed bne IntelliNews that at recent currency auctions held by the central bank and oil fund Sofaz, banks' demand for foreign currency has exceeded the offer by $600mn. The two institutions have held regular biweekly currency auctions since January in order to cover banks' demand for foreign currency, and maintain the manat afloat through a controlled flotation. It did not take long for the shortage of foreign currency to reflect itself in the market and to stoke fears of a further depreciation.
Since August 19, a black currency market has emerged in the country, Turan news agency reports, which is sometimes fuelled by bank employees themselves, who choose to sell dollars from their institutions at a premium on the black market. The official exchange rate for the manat stood at AZN1.62/$1 on August 22, but the dollar traded for AZN1.7/$1 on the black market, Bloomberg reported.
Banks such as Bank Respublika have halted currency exchange operations altogether, while others – such as Rabitabank - cap transactions at $200 per person, sources say. Other banks, such as the local branch of Turkey's Yapi ve Kredi Bankasi, claim that they are not restricting currency exchanges.
Monetary instability has plagued Baku since February 2015, when declining oil revenues and pressure from falling currencies in Russia and Central Asia prompted the regulator to drop the manat's peg to the dollar in order to enable Baku to save fast declining foreign exchange reserves. Since then, the Azerbaijani currency suffered a major depreciation in December and has been gradually falling since May despite the central bank's monetary tightening in recent months.
Questionable lending practices at some of the largest banks in the country, such as International Bank of Azerbaijan (IBA), which accounts for a third of banking assets, coupled with the monetary depreciation have resulted in major losses for the banking sector. Sources in Baku tell bne IntelliNews that the sector’s capitalisation declined from AZN4bn in February 2015 to AZN1.6bn in April 2016. The manat's depreciation caused a capital loss of AZN1.1bn, and two banks in particular - IBA and Bank Standard - accounted for AZN900mn of that due to their sizeable short foreign exchange (FX) positions (ie they are holding more in FX deposit liabilities than they have lent out as FX assets).
Throughout the crisis, banks have sought to maintain high ratios of FX-denominated assets to liabilities, the source added, but their assets have been eroded by the high level of non-performing loans (NPLs). Average NPLs in the sector stood at 8.4% at end-June according to the central bank, but a source has informed bne IntelliNews that the real figure is now closer to 40% of total lending. Meanwhile, the rate of dollarisation of liabilities, particularly deposits, exceeds 80%, according to ratings agency Fitch.
Baku has already closed down 10 banks since January over poor capitalisation, and set up a new banking supervisory body, the Financial Markets Supervisory Body (FMSB) in February, to nurse the sector back to health.
In a closed meeting with the banking association on August 15, FMSB chairman Rufat Aslanli reportedly told banks that stress tests performed by his institution had revealed that 10 banks representing a market share of 30% are in good health, that nine banks (13-15% market share) may require additional capital and that the remaining 14 banks are in urgent need of capital.
In a letter to lenders, FMSB gave banks a one-month ultimatum to devise strategies to address chronic violations of prudential norms, Bloomberg reported on August 19, threatening zero tolerance in monitoring the strategies.
Azerbaijani authorities have been opaque about monetary policy ever since the first devaluation in 2015. Two days before the manat was floated, Elman Rustamov, the chairman of the central bank, reassured Azerbaijanis that a sharp depreciation would not occur, and called rumours about a possible weakening of the currency unfounded in an interview with local television station AzTV. Trust in the regulator's transparency is therefore low, and the recent developments have sent the rumour machine into overdrive, with bankers fearing that a further depreciation would push their institutions over the edge. The current short FX position at Azerbaijani banks is said to be AZN5.3bn, AZN4.8bn of which is at IBA.
The Azerbaijani government took over the management of IBA in March 2015, and has injected some AZN3bn in bailing out the lender to date. IBA's meltdown has resulted in the arrest of several prominent businesspeople in Baku, some of whom, such as former IBA chairman Jihangir Hajiyev, remain behind bars. Others, like Nizami Piriyev, owner of methanol plant Azmeco, have been released, but their companies have been taken over by the government.
The manat is currently expected to depreciate to a value ranging between AZN1.8/$1 and AZN2/$1, and, judging by banks' open currency position, it will have the greatest impact on the government-owned IBA.
As expected, the central bank sought to dispel concerns about an upcoming depreciation in an August 22 statement to APA news agency by calling the rumours "groundless" and explaining that the exchange rate depends on supply and demand on the currency market. In its statement, the regulator failed to address the issue of the undersupply of FX in the last 10 days.