Dollar Drip-Feed for Azeri Banks Sets Off Deposit Auctions

Updated on
  • Central bank drains manat to stem speculation against currency
  • Azeri economic performance ‘weaker’ than anticipated, S&P says

Desperate times sometimes call for contradictory measures.

Authorities in Azerbaijan, a nation on the Caspian Sea that borders Russia, Turkey and Iran, have been forced into a balancing act, trying to supply banks with enough dollars while starving them of the national currency to discourage further speculation. Even as the country’s oil wealth fund provides dollars twice a week in auctions organized by the central bank, the monetary authority for the first time in June started operations to soak up manat by offering lenders to place funds on deposit. 

“The State Oil Fund or the central bank can’t meet the dollar needs in full, and the regulator wants to take out excess manat to keep banks from buying more dollars,” said Samir Aliyev, an analyst at the Center for Support to Economic Initiatives, a research group in the capital, Baku. “Instead of lending to businesses, banks are placing their manat with the central bank as deposits.”

Two devaluations last year and interventions that wiped out more than two-thirds of central bank reserves haven’t done enough to cope with the rising tide of demand for foreign currency. With oil closing in a bear market on Monday, strains will only intensify on the currency of the third-biggest cruder producer in the former Soviet Union after the manat already depreciated against the dollar in seven of the past nine weeks.

‘Necessary Measures’

“The central bank is taking the necessary measures to ensure stability of prices in the market, which is our ultimate goal,” Namig Aliyev, head of the central bank’s press office, said by e-mail. “Deposit auctions are one of the most important tools in our arsenal.”

The Azeri currency fell the most globally against the dollar on Thursday, depreciating 2.6 percent as of 5:57 p.m. in Baku. It’s the world’s third-worst performer this quarter. The manat suffered the biggest drop among all currencies last year when it lost about half its value against the dollar, according to data compiled by Bloomberg.

The regulator only raised 20 million manat ($12 million) in the latest auction on Monday, far below the 50 million manat it had sought. Lenders placed 202 million manat on deposit in six auctions since they began two months ago, according to the central bank, which said it’s using the operations to prevent sharp increases in money supply and keep inflation at “acceptable” levels.

Economy, Inflation

Inflation soared to 10.5 percent from a year earlier in the first half, compared with 3.5 percent in 2015. The economy swung into recession for the first time in at least two decades as construction fell. Gross domestic product contracted an annual 3.4 percent in the first six months after a gain of 5.7 percent a year earlier.

Azerbaijan’s performance has so far been “materially worse” than expected, S&P Global Ratings said last week as it cut the nation’s outlook to negative from stable. The ratings company lowered its GDP forecast to a decline of 3 percent in 2016 and predicted it will rebound by about the same amount next year.

The hydrocarbons industry represents about 40 percent of Azeri GDP and close to 95 percent of its exports, S&P estimates. The monetary authority and the wealth fund, known as Sofaz, are two of only three earners of foreign currency for the country, according to central bank Governor Elman Rustamov.

Dollar Lifeline

Sofaz receives most of the government’s oil-linked revenue and converts it into manat for transfers to finance the budget and infrastructure projects. It usually offers about $50 million twice a week, which is only enough to meet a fraction of bank needs. 

Demand at Tuesday’s auction was more than 10 times the $49.1 million sold, according to Aliyev at the Center for Support to Economic Initiatives. The efforts to ease pressure on the Azeri currency are inadvertently jolting the recession-hit economy as a whole, he said. The wealth fund sold another $49.4 million on Thursday.

Authorities are up against the wall because the share of dollar savings is now at almost 80 percent of the total, according to S&P.

That “severely limits the central bank’s attempts to influence domestic monetary conditions,” S&P said. “Apart from setting the country’s foreign-exchange regime and undertaking interventions, the central bank’s ability to influence economic developments remains considerably constrained.”

(Updates with currency performance in sixth paragraph, auction in 12th.)
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