Azerbaijan’s Manat Devaluation Threatens Banks, Moody’s Says

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Azerbaijan’s banks face risks to asset quality after the former Soviet Union’s third-largest oil producer devalued its currency, Moody’s Investors Service warned.

The central bank on Feb. 21 set the manat at 1.05 against the dollar, compared with 0.78 earlier. The move aims to strengthen “international competitiveness,” amid pressure on the the country’s finances from falling oil prices, the regulator said in a statement.

The economy of the former Soviet republic has slowed as oil prices fell 45 percent from last year’s peak while Russia’s plummeting ruble reduced the competitiveness of local industry and pushed peers such as Armenia and Kazakhstan to protect their currencies. Azerbaijan’s move is “credit negative” for banks such as the unit of VTB Bank OJSC and International Bank of Azerbaijan OJSC, Moody’s said in a statement Monday.

The step “pressures banks’ asset quality by weakening borrowers’ ability to repay loans, and inflates the size of banks’ foreign-currency-denominated liabilities,” Maria Malyukova, a Moscow-based analyst at Moody’s, said in an e-mailed report. The “devaluation will prompt customers to shift their manat deposits into foreign currency.”

Weaker Manat

The manat was 25 percent weaker versus Friday’s close at 1.03 per dollar by 6:33 p.m. in Baku, according to Bloomberg data, as the tightly regulated currency market opened after the weekend announcement. The devaluation follows a Feb. 16 decision to shift from a dollar-peg policy to tieing the manat to a basket, including the euro.

The yield on the nation’s $1.25 billion of 4.75 percent Eurobonds due March 2024 rose 2 basis points to 4.77 percent, climbing for a second day from the lowest close in almost three months. The rate peaked at 6.10 percent last month and set a low of 4.21 percent in October.

The central bank’s foreign reserves fell 11 percent to about $12.7 billion as of Jan. 31 from a year earlier, partly as it sought to protect the manat’s peg to the dollar. Standard & Poor’s lowered the outlook on Azerbaijan’s BBB- credit rating to negative on Jan. 30, citing the oil-price decline and pressure on the manat from “weaker terms of trade.”

Brent crude, the benchmark grade for more than half the world’s oil, has dropped about 45 percent since June last year. Azerbaijan produced the equivalent of 889,000 barrels a day of crude in January, the State Statistics Committee said Feb. 13.

Other former Soviet nations have also faced increased pressure on their currencies due to the decline in energy prices and as Russia’s economy slowed to the brink of recession.

Regional Moves

Georgia’s monetary authority raised its refinancing rate 50 basis points to 4.5 percent on Feb. 11 in response to what central bank Chairman Giorgi Kadagidze called increased inflationary expectations resulting from the weaker lari.

Armenia’s central bank has raised it’s refinancing rate 3.75 percentage points in two months to stem the dram’s 14 percent decline against the dollar in the past 12 months. Kazakhstan has resisted a large-scale devaluation this year after weakening the currency 19 percent a year ago.

The devaluation “heaps” pressure on the Kazakh tenge, Timothy Ash, the chief emerging-market economist at Standard Bank Group Ltd. in London, said by e-mail. “Armenia, Georgia and Azerbaijan have now all moved to try and set more competitive exchange rates in the wake of the ruble’s demise over the past year.”

(An earlier version of this story corrected the date of the central bank statement.)