Business consultancy project

Financial Market in Azerbaijan

4.1 Background

Dynamic development of Azerbaijan and investment attractiveness of the country are directly related to the emergence and performance of an efficient, stable, and flexible banking system. Creation of such a system was declared as one of the main goals of market reforms going on since the mid-1990s.
Nowadays, Banks dominate on the Azerbaijan financial field in comparison with the other financial institutions. For instance, 95% of the total assets of the market belong to the banks.
The financial system in Azerbaijan is determined by the policy conducted by the government and arrangements in respect of lending and borrowing funds, including the transfer of assets. The banking system, financial institutions, such as insurance companies etc., pension system, financial markets, and payment systems, constitute the financial system of Azerbaijan. (Finance System in Azerbaijan, 2019)
Oil profits determined many years of growth in Azerbaijan until 2015 when the fall in oil prices led to the increased inflation rates and negative impact on the financial sector (Partnership for Environment and Growth, 2018)
National currency of Azerbaijan, Manat, experienced two major and sharp devaluations in February and December of 2015 as a result of plummeted oil prices – from USD 120 to USD 60 per barrel during first devaluation, while at the time of the second currency devaluation the price plunged to USD 27 per barrel only (Report.az, 2019).
Devaluations occurred in 2015 undermined the development of the non-banking financial sector, notably micro-finance field suffered extremely. Before the devaluation in 2015 45 banks performed in our country. (Currency devaluation: The case of Azerbaijan, 2016) Following the currency shocks, 19 banks were closed in 2016 due to non-performing loans, low quality of assets, insufficient liquidity level, and the overall economic decline.
While, in 2018 the largest national Bank, the International Bank of Azerbaijan (IBA), which is the majority state-owned bank of Azerbaijan, was filed for restructuring in the Court and defaulted on its outstanding debt. (Azerbaijan - Banking and Financing, 2019). Moreover, IBA also filed in the foreign courts such as USA and UK Courts to maintain recognition of the restructuring in abroad jurisdictions as well. (The world factbook, 2018)
While, economic reforms, such as stimulation of export activities, improvement of the business situation as a result of wise governmental policy reflected in the Strategic Road map, led to the economic growth of 0.1% in the oil and 2.7% increase in the non-oil sectors in the country in 2017. (EBF EU, 2018)
The Strategic Roadmap was developed aiming at the successful adaptation to the challenges of the “post- oil” model and existing environment observable in the global economy and financial markets. The Strategic Roadmap was based on the Decree of the President of Azerbaijan Republic “On approval of “Main directions of the strategic roadmap for the national economy and main sectors of the economy” and issues arising out of this” adopted in 2016. The roadmap embraced the strategic vision and action plan for the period till 2025, and one of the main goals can be described as establishment of the effective financial system to address the risks after 2015 aimed at the changing of structure and analyzing the capital of banks and insurance companies to improve their assets and mitigate the risks.
However, the gradually growing oil prices led to the budget surplus of USD 1.7 billion in the current account balance. Meanwhile, the deficit observed in 2015 and 2016, which constituted $9.1 billion in 2015 and $2.8 billion in 2016 accordingly, diminished to USD 0.1 billion. The balance of payments improved not only as a result of increased oil prices but also due to the surplus in the tourism sector and portfolio investments. Consequently, foreign exchange reserves of Azerbaijan grew by USD 2 billion.
Moreover, in 2017 the Central Bank of Azerbaijan (CBA) augmented the monetary base by 8.7% to maintain the demand and the degree of monetization based on the consistently improving exchange rate of national currency and growth of the non-oil field of economy.
The reserves of the CBA at that period strengthened and grew by USD 1.4 billion and amounted to USD
5.3 billion (Center for Economic and Social Development, 2018)

The number of ATMs and POS terminals decreased in 2017, for instance, the number of POS terminals dropped from 71,806 in 2016 to 65,471 in 2017 (EBF EU, 2018).

Meanwhile, POS terminals’ number was gradually increasing throughout the last year and reached a total number of 66,610 in the country at the end of 2018. However, the downward trend is observed in the period of 6 months of 2019 and the number reduced from 65,975 in January 2019 to 63,396 in June 2019. (Central Bank of Azerbaijan, 2018).

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