Currency Rescue Proves Political Cure-All Before Azeri Vote

(Bloomberg) -- A currency rescue is what passes for a political campaign in Azerbaijan.

As the weeks ticked away before a referendum in late September on changing the constitution -- with nary a televised debate or public polling -- the Azeri authorities sprung into action after the manat depreciated for three months and panic stirred on the streets of the capital. The nation’s sovereign wealth fund, together with the central bank, held out $1.15 billion at auctions in the past weeks to ease pressure on the manat and contain growth in consumer prices, the most offered to lenders since the height of Azerbaijan’s currency crisis in January when oil prices collapsed.

The government’s goal was “to ensure financial stability ahead of the referendum,” Samir Aliyev, an analyst at the Center for Support to Economic Initiatives, a research group based in Baku, said by e-mail. “I can’t see any other reason for the hike in dollar offer.”

A month that started with Azerbaijan in the grip of a new run on the manat, as many banks halted foreign exchange after demand soared, is ending with the national currency staging the world’s biggest rally in the past three weeks. Armed with a $35.9 billion war chest in its wealth fund, almost equivalent to the nation’s entire economic output, authorities set out to sate the dollar-starved country by selling as much as six times the amount previously offered at auctions.

Emergency Hike

Coupled with an emergency increase in interest rates by 5.5 percentage points announced on Sept. 9, the push was enough to turn around the fortunes of a currency that suffered the world’s biggest drop last year when it lost about half its value against the dollar in two devaluations.

Its prospects are less clear now, after official statistics showed Azeris voted overwhelmingly on Monday in favor of amending the constitution to hand sweeping new powers to President Ilham Aliyev, changes that have drawn criticism from international organizations. As the manat nosedived in August, demand for dollars by local banks at some foreign-currency auctions exceeded the amount offered by more than 10-fold.

“Dollar demand is expected to rise again by the end of the year because of an increase in imports,” Vugar Bayramov, head of the Center for Social and Economic Development, a research group in Baku, said by e-mail. “Banks, government agencies will need dollars to repay their foreign debt. I expect pressure to increase on the manat at year-end.”

Confidence Crisis

The run on the manat reflected Azerbaijan’s failure to restore people’s confidence after the devaluations, adding to the burden on banks that already survived a cull of the industry by the regulator and endured a frenzy on the foreign-exchange market last year, when savers fled deposits in the national currency. The share of dollar savings is now at almost 80 percent of the total, according to S&P Global Ratings.

“If the manat were to depreciate markedly again, it would further weaken asset quality at Azeri banks, putting additional pressure on the already fragile sector, which must now also adjust to the recent increase in the refinancing rate,” Ernest Sergenti, lead analyst for Azerbaijan at Moody’s Investors Service, said in e-mailed comments. “The potential for further weakening of the banking sector would increase contingent liability risk for the government.”

The manat weakened 0.5 percent to 1.6333 against the dollar as of 12:03 p.m. in Baku on Friday. Two days earlier, the currency jumped the most in two weeks after the Organization of Petroleum Exporting Countries said its members agreed a preliminary deal to trim production. The Azeri currency isn’t “that far from fair value,” said Paul Gamble, a senior director at Fitch Ratings, which forecasts a rate of 1.75 against the dollar in the short term.

Currency Outlook

“It’s definitely possible the currency could weaken beyond this level, because confidence in the manat is low, reflecting the previous delayed and poorly communicated devaluation and a lack of clarity in central bank exchange rate policy,” Gamble said by e-mail. “Over the medium term we would expect the manat to move fairly closely in line with oil prices.”

The central bank used up more than two-thirds of its reserves last year to support the manat as oil prices collapsed, before shifting to a managed free float in December. The currency remains under pressure, affected both by global and domestic factors, central bank Governor Elman Rustamov said this week, ruling out a sharp devaluation and saying the monetary authority is taking necessary measures to ensure the manat’s stability. Expectations of a post-referendum devaluation was one reason the currency recently took the hit, according to ING Groep NV.

Not Enough

Until early September, the sovereign wealth fund known as Sofaz offered only $50 million in auctions held twice a week, which hasn’t been enough to supply banks. The oil fund is the biggest source of foreign currency available to the Azeri authorities. 

Sofaz, which receives most of the government’s oil-linked revenue, had $35.9 billion in assets at the end of August, according to the Finance Ministry. The central bank’s reserves grew slightly to $4.19 billion in August, a month after slipping for the first time since February.

“The central bank’s foreign-currency reserves are down to the psychological barrier of $4 billion,” Bayramov said. “Sofaz will also complete its transfers to the state budget by mid-December. Therefore, we’ll again see demand exceeding offer in auctions, as it was the case in the summer.”

To contact the reporter on this story: Zulfugar Agayev in Baku at zagayev@bloomberg.net. To contact the editors responsible for this story: Hellmuth Tromm at htromm@bloomberg.net, Paul Abelsky, Alex Nicholson