Azerbaijan economy: Reserves continue to fall

EIU also said:

"The latest figures indicate that even after the currency correction in late February, devaluation expectations in Azerbaijan remain high. Azerbaijanis are continuing to shift assets into foreign currency, leading to a squeeze in manat liquidity. 

"The volume of M2, a measure of the money supply, declined by 8.2% month on month in March (seasonally adjusted), following a fall of 15.9% in February. The value of foreign-currency-denominated deposits rose by 7.8% month on month. This has put the currency under pressure, forcing the CBA to sell foreign reserves in order to support it.

"The flight from the manat has raised the risk that the CBA will be forced to conduct another currency adjustment in order to prevent the further depletion of reserves. However, we continue to believe that another devaluation is unlikely for several reasons. First, following the major devaluation in February, the manat does not appear to be seriously overvalued and we believe that Azerbaijan again has a positive current-account position.

"Second, a further devaluation would only compound the central problem facing the CBA, which is a loss of confidence in the currency and the central bank's exchange-rate policy. Third, another currency adjustment could provoke public anger, and would put the banking sector under further pressure.

"The CBA is now grappling with a similar problem to that of Kazakhstan's central bank, which devalued the tenge in February last year and has since had to manage persistent public fears of a further currency adjustment. In Kazakhstan's case, we believe that the authorities have supported the currency by putting informal pressure on state exporters to increase their tenge holdings, and may also have used assets in the sovereign wealth fund to underpin the currency. 

"We expect the Azerbaijani authorities to take a similar approach, which assumes that confidence in the currency will gradually return over time, particularly if oil prices start to recover. Nevertheless, risks to our currency forecast have increased, and the potential for another devaluation cannot be excluded, particularly if oil prices fall further."