Azeri Government Fails to Reassure on Economy

Consumers complain they are feeling the pinch, while analysts warn there could be even more problems ahead.

Azeri Government Fails to Reassure on Economy

Consumers complain they are feeling the pinch, while analysts warn there could be even more problems ahead.

Friday, 5 December, 2008
The Azeri authorities insist the country will weather the global financial storm, but experts remain unconvinced and warn that Baku may now struggle to raise funding for major investments in oil infrastructure.

With house prices falling and consumer lending down, the government’s assurances do not appear to have calmed the public either.

Economy minister Heidar Babayev insisted the country had nothing to worry about.

“The world financial crisis is not going to have any effects on the Azerbaijani economy, and whatever impacts can be seen today are of a psychological character, rather than financial,” he said in October. He later altered his assessment to say there would be no “serious effects”.

Yet in recent weeks, many leading banks have been forced to limit consumer loans or suspend them altogether, citing liquidity problems.

Personal loans have become very popular in Azerbaijan in recent years, with middle-income Azerbaijanis buying cars and other goods on tick, despite high annual interest rates of between 18 and 30 per cent.

The withdrawal of loan products has caused public speculation the country’s leading banks might be going bankrupt, despite official insistence that they are in good shape.

“I was going to buy a car in November,” said Emin Mustafayev, 32.

“But the bank refused to give me a loan, though just a month before they’d promised the opposite thing. They said my salary was not enough for them to view me as solvent, and, with the crisis raging, the bank could not take risks providing loans to clients like me.”

In an attempt to re-energise the loans market, the National Bank lowered its interest rates on October 14, including the rate at which it lends to local commercial banks, seen as a key indicator of monetary policy.

The bank, last month, also lowered the level of compulsory reserves to be held by banks from 12 to nine per cent of deposits. Soon after that, some banks began to provide loans again, although mostly to their regular clientele.

Restricted consumer credit has had a knock-on effect on retailers, and other businesses.

“As a result of the world financial crisis, our firm, which is engaged in the services field, has been receiving far fewer orders,” said Narmina Ahmedova.

“Our main clients were foreign companies working in Baku, and they have now become very thrifty. This mean our salaries have been cut by 25 per cent.”

Ahmedova now fears what might happen to her position in the future, “I am afraid that if the situation does not improve, the firm will have to lay off some of its staff, and I will find myself jobless.”

The housing market has also slowed. A survey conducted by members of the Real Estate Market pressure group revealed that the price of a square metre of second-hand housing in Baku fell by 2.7 per cent in October.

The national bank, meanwhile, has denied that there are any significant problems with the economy.

“The problem is not in the banking sector of Azerbaijan, but in the liquidity in the world’s markets,” said Jahangir Hajiev, who chairs the board of the largest bank in the South Caucasus, the International Bank of Azerbaijan. Hajiev told journalists the greatest impact of the crisis would be that no new lines of credit would be extended to banks for some time to come.

Elman Rustamov, chairman of the National Bank’s board, insisted the country’s economy as a whole was in a strong enough state to withstand the crisis.

“The country’s liquid means are twice as large as its overall debt,” Rustamov told journalists.

Others were quick to deny suggestions that economic problems could lead to the collapse of the financial sector.

“Today, banks in Azerbaijan are not affected by the crisis in a way that could lead them to bankruptcy,” said Azad Javadov, executive director of Azerbaijan’s Deposits Insurance Fund, ADIF. “Though there might be more serious problems if the crisis deepens further.”

But independent economic experts are not reassured, and say that the worst effects of the global economic downturn may be yet to come.

Analyst Gubad Ibadoglu said Azerbaijan was threatened by the collapse in oil prices.

Global oil prices have plummeted more than two-thirds, from close to 150 US dollars a barrel in July to 47 this week. Azerbaijan’s budget, however, is based on a price of 80 dollars a barrel.

“The oil prices are now falling quickly, which is very bad for the country, where 80 per cent of the budget is oil money, and where everything is tied to oil,” said Ibadoglu.

“The decline in oil prices has shown how dangerous it is for Azerbaijan to remain dependent on this.”

Ilham Shaban, director of the Oil Research Centre, said that even if oil prices slumped to 50 dollars per barrel, it would in no way harm Azerbaijan’s budgetary commitments.

He noted that the country could dip into its oil fund – an account designed to cushion the economy from changes in the price of oil and to save money for future generations.

“Besides, Azerbaijan is expected to receive great revenues from oil sales between 2009 and 2014, which will save our economy,” he said.

Yet Shaban said that with the world’s credit markets still dry, Azerbaijan’s oil production and transportation projects could be jeopardised.

There are plans to start building a new oil-producing platform worth 5 billion dollars on the Chirag oil field by 2010. Also scheduled is the second phase of development at the Shah-Deniz oil field, a project estimated at 10 billion dollars.

“Because of the financial crisis, Azerbaijan and international oil companies will find it difficult to get large loans from banks in the near future,” he said.

Emil Guliev is a freelance journalist working in Baku.
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