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NATIONAL BANK OF AZERBAIJAN KHAGANI ABDULLAYEV, EXECUTIVE DIRECTOR Contents 2 1. Recent Macroeconomic Developments 2. The Global Crisis and the Banking System 3. Prudential Regulation and the Monetary Policy 4. Policies for 2009 1. Recent Macroeconomic Developments 3 High economic growth has been driven by the oil industry expansion and active fiscal policy Fiscal Policy and Economic Growth Economic Growth in Azerbaijan, % 70 24% 60 20% 83% 77% 60% 16% 50 90% 19% 60% 12% 40 8% 30 4% 0% 20 30% 15% 2003 14% 2004 8% 2005 12% 2006 11% 15% 0% 2007 2008 П 10 Growth rate of non-oil GDP ВВП темп роста ненефтяного 0 2003 2004 2005 GDP growth rate 2006 2007 Oil GDP growth rate 2008 темп роста неторгуемых отраслей Growth rate of the non-tradable sector темп роста гос. расходов (правая шкала) Growth rate of public expenditures (right scale) 1. The average annual growth rate stood at 24% in 2004-2007 2. Rising public expenditures (investments) has been the main force behind booming nontradable activities. Up to 75% of new jobs have been concentrated in the non-tradable sector. 1. Recent Macroeconomic Developments 4 Growth of money supply and inflation 25% 180.0% The non-oil fiscal deficit, mln.AZN 21% 20% 17% 15% 120.0% 6000 2005 2006 -10% 2007 -60.0% 2000 Money supply growth (right scale) Темп роста денежной массы (правая шкала) Реал. % по кредитам Real interest rate on loans 2003 2004 2177 2004 0.0% 1097 2003 -4% 2008 4000 564 0% 60.0% 644 106% 45% 5% 3644 168% 10% -5% 8000 7277 Given the large scale use of the oil revenues, the money supply almost tripled in 2006-2008 0 Среднегодовая Annual average инфляция inflation 2005 2006 2007 2008 (11 мес.) 1. The non - oil GDP monetization reached almost 40%; 2. Aggregate demand expansion has been followed by rising inflation, while the real income growth staying positive (10-15%) ; 3. Declining real interest rates stimulated “consumer credit boom”. 1. Recent Macroeconomic Developments 5 The current account surplus reached 40% of GDP. Given the growing demand for credit, banks increased external sources of borrowing External sector and bank borrowings 120% 2500 98% 100% 80% 40% 72% 64% 60% 48% 2200 1500 46% 29% -20% 2. Banks’ loan portfolio increased 5 times in 2004-07. 1000 20% 0% 2000 1. The ratio of loans to individuals to consumption expenditures increased from 3% to 22% in 2001-2007 1% -28% -30% 2003 2004 2005 -40% 18% 2006 31% 2007 38% 2008 500 0 3. 2/3 of the loan portfolio has been concentrated in the non-tradable activities Темп роста Growth rate кредитов of external loans Current Счет тек.account/GDP операций/ВВП Banks’ foreign borrowings,банков, million manats (right scale) шкала) Внешние обязательства млн. ман. (правая 4. Ratio of bank assets to the non-oil GDP approached 60% 1. Recent Macroeconomic Developments: Growth Stabilization in 2008 6 As the oil extraction approached its peak level, the growth of the industry started stabilizing, inflation rate showed signs of declining Monetary base growth rate 101% 48.5% Credits growth rate 98.2% 46% 29/12/2008 5% 19/12/2008 45% 09/12/2008 Real Estate Prices 29/11/2008 15.4% 19/11/2008 19.6% 09/11/2008 Headline Inflation 30/10/2008 15.4 20/10/2008 11.4 10/10/2008 non-oil GDP 30/09/2008 10.5 As of end of December 0.7899 20/09/2008 36.8 0,8453 10/09/2008 oil GDP 0.830 0.820 0.810 0.800 0.790 0.780 0.770 0.760 0.750 0.740 31/08/2008 12.7% 21/08/2008 26,8 GDP growth rate, % The basket value of AZN 11/08/2008 2008 01/08/2008 2007 1. With the world financial crisis turning into global recession, Azerbaijan was not under its heavy impact 2. Inflation did not grow as high as in 2007 due to 1) falling commodity prices at the world markets 2) the Nominal Effective Exchange rate appreciation at more than 12% (AZN is pegged to basket) 3. The money supply growth has been twice lower than in 2007, but the non-oil GDP continued growing at two digit level as a result of sufficient fiscal stimulus to economy 1. Recent Macroeconomic Developments: Global Crisis, External and Fiscal Sustainability 7 Strategic foreign exchange reserves (State Oil Fund, Central Bank and Treasury) of Azerbaijan - 18.1 bln. USD 1. Reserves/ gross foreign debt ratio: 200% 2. In months of the non-oil imports of goods and services: 27 months International Investment Position, net claims: 13 bln. USD Share of bank’s external liabilities in total liabilities : 25% Forecast for the State Oil Fund reserves with the oil prices of 30$ per barrel, in percent of GDP (transfers to state budget excluded) 2009 2010 2011 2012 14% 13% 11% 9% 2. The Global Crisis and the Banking System 8 Banks’ reaction to global crisis was quite rational: over 1 bln. USD out of outstanding foreign debt was paid back. In addition, under psychological impact of global crisis and prudent risk management policies of the central bank, banks switched to conservative credit policies . The growth rate of credits moderated Growth rate of loans in Azerbaijan, % Monthly growth rate of credits in 2008 40% 120 35% 98.2 100 30% 25% 80 20% 64.0 15% 60 47.6 46.4 45.6 10% 5% 40 28.9 0% 20 -5% 7 0 2002 2003 2004 2005 2006 2007 2008 Small-sized banks IBA Medium-sized banks Banking system 2. The Global Crisis and the Banking System 9 2000 Liquid assets and the liquidity composition in 2008, mln AZN Schedule of the foreign debt service by banks 25 400 1800 9.00% 8.0% 1600 20 7.5% 350 1400 8.00% 6.7% 1200 15 250 1000 800 10 7.00% 300 5.2% 6.00% 5.4% 5.00% 200 600 400 5 200 150 100 0 0 283 218 317 337 Nostro T-bills cash liquid assets/assets (right sc) 3.00% 228 2.00% 50 1.00% 0 correspondent accounts 4.00% 0.00% december I quarter 2008 2009 II quarter III quarter Iv quarter 2009 2009 2009 external debt, mln. manat external debt/assets (right sc) 1. Because of squeezing schedules on the foreign debt service, banks accumulated enough liquid assets as a precautionary step to safeguard against any unexpected events 2. Ratio of liquid assets to the foreign debt stock is 99%, while its ratio to total assets is 21% 3. Prudential Regulation and the Monetary Policy: Main Steps in 2008 10 PRUDENTIAL REGULATION: 1. Strict Provisioning Policy and Tight Lending Standards: o increased risk classification of assets o increased LTV (from 120 to 150%) 2. Risk Management requirements - private action plans on individual banks MONETARY POLICY: 1. Reduction of the main refinancing rate from 15% to 8% 2. Reduced required reserves from 12% to 6% Provisions 450 7% 400 6% 350 5% 300 250 4% 200 3% 150 2% 100 1% 50 0 0% 3. Abolition of a 5% reserve requirement on external borrowing 4. The resulting impact: liquidity injection equivalent to 10% of the monetary base Provisions, mln. manat Provisions/credit (right sc) 3. Prudential Regulation and the Monetary Policy: Policy Results 11 Overdue loans in 2008 80.0% Savings of individuals, mln. AZN 7.0% 2000 1800 6.0% 60.0% 1600 5.0% 40.0% 1400 1200 4.0% 20.0% 1000 800 3.0% 0.0% 2.0% 600 400 200 -20.0% 1.0% -40.0% 0 0.0% Growth rate of overdue loans, % Growth rate of loans, % demand deposits term deposits Ratio of overdue loans to portfolio, % (right sc) Main policy outcome in 2008: Stability, High Liquidity, Adequate Portfolio Quality 4. Policies for 2009 Risks in 2009: 12 - Uncertain oil prices and global demand; - Decline in investment flows around the globe; - Impact of crisis in neighbors (Russian Federation: ruble depreciation, falling money remittances etc.) Main Policy Task: Smoothing the impact of global crisis on domestic economy and prevention of the sharp demand contraction Supporting Policy of the National Bank of Azerbaijan: - Sound Prudential Policy (strengthening the capital position, maintaining adequate level of the asset quality , liquidity and risk management) - Liquidity Support to banks through activating the refinancing facilities - Allow for More Exchange Rate Flexibility to Absorb External Shocks and to Focus More on Liquidity, Demand Management and Inflation Targets - Confidence measures: Central Bank”s guarantee on lending at the interbank money market and further increase of the deposit cell covered under the current deposit insurance scheme 13 THANK YOU!