The Oil Drama of Azerbaijani Manat Deflation


It is obvious that the world is depended on energy resources and oil plays an important role among these resources. It is also pretty clear that Oil has significant impact on global economic developments as development involves energy. In times of crisis the demand for Oil goes down, hence a chain reaction takes place. We have seen the impact of oil in economies like Russia, Kazakhstan as well as some OPEC countries whose economy is oil depended.

There is one specific country in the Caucasus which most of the world knows them for their participation in Eurovision, upcoming 2015 European Games, Flame Towers, Atletico Madrid sponsorship and their nationwide slogan “LAND OF FIRE”, yes you guessed it right, I am talking about Azerbaijan.

Land of Fire put their national currency literally on fire over the weekend. The central bank of the Republic of Azerbaijan devaluated the national currency Azeri Manat across the board by 33.5% on Saturday, creating a nationwide chaos.

AZN’s devaluation by a third over the night must have been expected for the country as fossil energy exports makes the majority of the national exports (95%). With the recent oil price tumble the pressure on the government started to weigh as the central bank of Azerbaijan did everything within their power to keep the national currency as stable as possible, this involved spending almost 2.2 billion AZN and draining their foreign reserves as well, before giving in to the market.

Notwithstanding the reasons, the devaluation decision came as embarrassment for the Azerbaijani government, which just couple of days ago had assured the public that they would maintain the stability of AZN despite falling oil prices and easing would come in small steps.

In an official statement the central bank of Azerbaijan announced that the 34% devaluation decision was made “in order to support diversification of Azerbaijan’s economy, strengthen its international compatibility and export potential as well as to provide balance of payments sustainability”. Well, the question is which exports? Oil? It is already done in USD and the minor agriculture exports to Russia is mostly done in foreign currency outside Ruble and AZN.

How and Why did Azerbaijan devaluate AZN?

  • Azerbaijan is a post-Soviet union country with massive oil reserves

    • Population: 9 million
    • Area: 86,600 km2
    • Currency unit: AZN
    • GDP per capita: 3,252 USD vs 650 USD in 2006
  • Oil and Gas exports make 95% of the total exports
  • Oil and Gas sales make 70+% of the government revenues
  • AZN had been pegged against USD since 2011 had been traded at 0.78 level since then
  • The Azerbaijani State Oil Fund projected oil prices to be at $90 per barrel in 2015
  • The 2015 state budget was calculated according to SOCAR’s $90 per barrel price expectations
  • The government has ongoing huge state expenses for the 2015 European games
  • 40% of the national savings are held in USD accounts vs. 37.8% in 2014
  • With $50 per barrel oil prices State Oil Fund’s revenue is expected to be 4.7 Billion USD vs. 16.3 Billion USD in 2014 a whopping 71.2% YoY decline

On the 16th of February, the Central Bank of the Republic of Azerbaijan decided to scrap AZN’s USD peg with the following statement:

Central Banks, Azerbaijan, AZN, Deflation, Currency Peg Statement of the Central Bank of the Republic of Azerbaijan

 

Only five days after the operational framework announcement, on the 21st of February, the bank made further amendments to USD/ AZN exchange rate, defining the official exchange rate as 1.05 AZN.

 

What is next?

With its current budget structure, it appears that the 33.5% Azerbaijani Manat deflation could indeed be the primary “minor” easing of the AZN and the main target could possibly become as 2.00 AZN per USD.

The catch however is that, Azerbaijan is not an industrial country. Majority of the usual consumer goods are imported. With 33.5% deflation could possibly trigger the beginning of hyperinflation in the country. Especially the food products which are majorly imported from the West, Turkey, Iran and partially Russia could be right away hit with 33.5% price hike. Pharmaceutical products which are majorly imported from Western Europe and Russia will have inevitable price hike as well.

 

What could the Azerbaijani government do?

The Azerbaijani government could possibly grab this situation as an opportunity to look back to its fundamentals. Obviously putting all your eggs into one basket does not work and the results are crystal clear. The government could meanwhile focus on its young educated workforce and push for non-oil production developments and encourage SME’s operations within the country.

 

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