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The State Oil Fund of Azerbaijan (SOFAZ) said it will save almost $2 billion in 2016 due to the December 21 devaluation of Azerbaijani national currency (manat), according to Trend agency.
Fitch Ratings agency predicts negative consequences of the second devaluation for the quality of assets and capital of banks, Trend reports. Dmitry Vasilyev, the director for financial institutions at Fitch, told Trend that Azerbaijan’s banking sector is facing two risks.

“Firstly, the assets in manats will rise in price, and respectively the capital adequacy ratio of all the banks will fall [a corresponding demand on this from Azerbaijan’s Central Bank stands at 50 million manats], Vasilyev said. “Secondly, some banks have straight open foreign currency position, and they will have to accept large non-recurring losses from the currency revaluation due to manat’s devaluation, which will also affect the capital adequacy ratio.” Fitch official also said that the dollarization of deposits will continue in the country.

“This devaluation can be considered to be the result of the economic crisis in Azerbaijan deepened by the oil price fall.  This had to happen sooner or later because Azerbaijan’s economy depends on oil,” economist Zohrab Ismayil told Minval.az, according to Aze.az.

He stressed that the Central Bank of the country lost about 65 percent of its reserves over the past year, yet it was not able to keep manat at a stable rate. He believes the fall of manat will continue.

Turan reports that another expert, Azer Mehdiyev, the chairman of Centre for Assistance to Economic Initiatives, is suspicious over the ‘floating rate.’ He says the rate of the national currency is still being decided at the Central Bank and wonders why the exchange rate of manat was set at 1$/1,55AZN against dollar if switching to ‘floating rate’ presupposes giving up regulating it and letting manat ‘float’ to the level of its real value.

Natig Jafarli, an economist, told Minval.az that the only surprise in the situation was the 48 percent rate of the devaluation. “The economy still has not recovered from the first devaluation. The banking system is in an enormous crisis, people are not able to pay up their loans, workplaces are closed down and incomes are reducing. Now, the government’s step was tough, not at all clear and, to be sincere, not so clever. The economy will hardly survive a second such a large-scale devaluation,” the economist said. He also pointed out that really there were reasons to take such a step as the reserves of the National Bank of the country had reduced by 10 billion over the past year.

Fazil Mustafa, an Azerbaijani MP, writes on his Facebook page that the devaluation will aggravate the quality of life of the population of the country. “Unemployment, poverty, inability to pay up credit loans and other depts,” the MP writes as cited by Minval.az. According to Mustafa, most probably, Azerbaijan will not be able to ‘get out of this deadlock for many years.’
According to Report.az, the buy and sale rate of dollar and euro rose to 1.55-1.58 AZN/USD and 1.66-1.71 AZN/EUR respectively in the exchange market following the new devaluation.

After the rise of the dollar exchange rate, several banks in Azerbaijan stopped giving out credits, Minval.az reports citing Musavat.com.

Sputnik-Azerbaijan reports that the manat devaluation has troubled Baku residents who fear of a rise of the food prices. “The Central Bank’s devaluation of manat resulted in a panic among the population,” the website writes. Many predict mass protests in case the food prices rise.

“The food prices will grow in Azerbaijan,” expert Vakhid Maherramov told the website SalamNews. He explained this by the fact that a number of food products are imported into Azerbaijan from other countries and are mainly purchased in dollars. While the country’s incomes reduce, its currency expenditures rise, and there is no base for rising salaries, according to the expert.

Haqqin.az reports that, after the Central Bank’s decision to devaluate manat, the trade came to a standstill in Azerbaijan as the manufacturers stopped supplying their products to the trading networks in Baku. A salesperson from Azersun holding said the new lot of goods would arrive for higher prices. “As far as I know, the sale of cigarettes and alcohol drinks has already ceased. We still sell the food products for the old prices, but tomorrow they may grow by 50 percent,” he said.

According to the website, people buy large amounts of food and basic necessity products. Trade stopped in electronics stores. Sales assistants said they would reopen after recounting new prices. Clothing stores work but the New Year discounts have been cancelled in most of them. People literally assaulted the counters in many stores, Haqqin.az writes.

The website reports that the tourism market also reacted to the news about switching to floating rate. Nakhid Bagirov, the head of the Azerbaijan Tourism Association, said the growth of dollar exchange rate will tell on the prices of outgoing tours.

Oxu.az writes that the ‘floating rate’ again highlighted the problem of the loans taken from the banks, an issue which remained unaddressed during the previous devaluation. “Those who have taken credits in dollars will face serious problems after switching to the floating exchange rate. These people took the loans when the dollar still cost 78 manats,” the website cites economic expert Vugar Bayramov as saying.

Musa Guliyev, the deputy chairman of the Parliamentary Committee for Health, told Trend that Azerbaijan purchases 95 percent of its medicine abroad for dollars, and the change of dollar rate against manat will affect the medicine prices, as well.

Azerbaijan’s manat plunged to the weakest on record after the central bank relinquished control of its exchange rate, the latest crude producer to abandon a currency peg as oil prices slumped to the lowest in 11 years. The manat, which has fallen in only one of the past 12 years, nosedived 32 percent to 1.54 to the dollar, Bloomberg writes http://www.bloomberg.com/news/articles/2015-12-21/azerbaijan-moves-to-floating-exchange-rate-letting-manat-tumble.

Azerbaijan relies on hydrocarbons for more than 90 percent of its exports and the manat has lost almost half its value against the dollar this year, the worst performance of currencies globally. The Azerbaijani central bank’s reserves were at $6.2 billion at the end of November, down from more than $15 billion a year earlier. “The only real surprise is that they waited so long, blew scarce FX reserves in the process, and thereby undermined the sovereign balance sheet and credibility and confidence in the process,” Timothy Ash, head of emerging-market strategy at Nomura International Plc. in London, told Bloomberg.
 
Independent economic expert Samir Aliyev told Reuters http://in.reuters.com/article/azerbaijan-rate-idINL8N14A0BU20151221 another devaluation can occur if the oil price falls further. Vakhid Akhmedov, a member of the parliamentary economic policy committee, told Reuters, "The manat has not yet found its bottom ... If the oil price is much lower than $50 per barrel for a long time, I don't rule out that we may revise the state budget."

Chris Weafer, a partner at the Macro-Advisory consultancy, said collapsing oil prices meant the decision to let the manat float was "long overdue." He said he thought Azerbaijani authorities had delayed acting so as not to risk financial sector disruption or a public backlash ahead of a parliamentary election last month, which allies of President Ilham Aliyev easily won.

"[This] has led to a great deal of uncertainty about the economy and slowed investment," Weafer told Reuters. "It has also been an expensive exercise in that the budget is likely to have shifted from a small surplus in 2014 to a deficit close to 7 percent of GDP this year.” Inflation could now rise as imported goods and services became costlier, he said, which in turn may force the central bank to raise interest rates to curb inflation and prevent capital outflows.

Mark McNamee, an analyst at Washington, D.C.-based Frontier Strategy Group told The Wall Street Journal http://www.wsj.com/articles/azerbaijanimanat-buckles-after-government-drops-dollar-peg-1450738187 that Azerbaijan may have been waiting for the US Federal Reserve to raise short-term interest rates, which it did last week for the first time in nine years.

“They should have done this much earlier and moved to a free-floating currency and take the pain much earlier,” he said. “They probably wanted to float the currency after the U.S. rate rise, so to some extent they could put the blame on external factors.” Azerbaijan joins a growing list of former investor favourites whose economies are crumbling as oil prices continue to slump, he added.

Simon Mandell, senior vice president of Central and Eastern European, Middle East and African equities at New York-based frontier markets brokerage firm Auerbach Grayson, believes other countries whose currencies are under strain may have to follow suit. He pointed to Venezuela, Nigeria, Egypt, Oman, Iraq, Libya and Ecuador.

Azerbaijan’s Central Cank abandoned its dollar peg on Monday and allowed its currency to tumble by almost a third, the latest sign of how the oil price fall is hurting energy-dependent economies, Financial Times writes. According to the outlet, the step put manat ‘on track to be the world’s worst-performing currency this year.’

Azerbaijan’s move — its second major devaluation of its currency this year — ‘echoed Kazakhstan’s move to a free float of its currency in August, triggering a more than 40 per cent fall over the subsequent four months.’ The sharp currency fall will help Baku, which had drawn up its 2016 budget on the basis of a $50 oil price, balance its books, according to Financial Times.

However, the outlet writes, it is likely to hurt ordinary Azerbaijanis with salaries, pensions and savings in manat. Tim Ash, analyst at Nomura, said that “concerns . . . over social stability, and the level of popular support for the Aliyev regime” could explain why the Azerbaijani authorities had delayed the devaluation until now.

The move will also hit the Azerbaijani banking sector, as widespread devaluation expectations prompted individuals and companies to convert their deposits to dollars, creating a mismatch between banks’ loans and deposits. According to a November report by Fitch, the rating agency, at the end of June 70 per cent of Azerbaijani bank deposits were denominated in foreign currencies, Financial Times writes.

On 21 December 2015, the Central Bank of Azerbaijan made a decision to switch to a floating rate of the national currency manat. As a result, the exchange rate of the US dollar and Euro to manat rose by 47.6 percent and 47.9 percent and stood at 1.55 manats and 1.685 manats, respectively. 

Back in May 2015, the international rating agency Moody's Investors Service predicted that the Azerbaijani manat would continue to devaluate and that the economy development rates would reduce in the second half of the year. It had doubts over the stability of the banking system of Azerbaijan and the banks’ maintenance of their securities and deposit obligations. Standard & Poor`s, credit ratings service, shifted the prediction for the State Oil Company of Azerbaijan to negative in the light of the $2 billion loss of the State Oil Fund. International experts say the oil price fall has seriously hit the financial capacities of Azerbaijan. The experts believed the country should not expect an economic growth of more than 1.9 percent in 2015. In 2014, the monetary reserves of the Central Bank of Azerbaijan fell by 2.78 percent.