Moody's changes to negative outlook for Azerbaijan banking system

The new report "Banking System Outlook: Azerbaijan", is now available on www.moodys.com.

Moody's notes that the slump in oil prices has put downward pressure on Azerbaijan's economy, given that the hydrocarbon sector accounted for close to 37% of nominal GDP at the year-end 2014. Moody's forecasts that Azerbaijan's GDP growth will slow to 1.0% in 2015, based on an assumption of oil prices averaging $55 per barrel this year, and that growth will

only recover to 1.7% in 2016. 

Slower economic growth can be partially offset by government spending initiatives backed by a sizable pool of accumulated foreign-currency reserves (70% of GDP as of year-end 2014).

"Developments in the non-oil economy are the principal determinants for the banks' operating environment, and, as such, dictate the evolution of bank performance," said Maria Malyukova, a Moody's analyst and author of the report.

Moody's report says that alongside the weak operating conditions, the local-currency devaluation in February of this year is credit negative  for banks. 

"We believe that banks' asset quality will deteriorate following the local-currency devaluation, as most foreign-currency loans in Azerbaijan are to borrowers that do not have foreign-currency revenues. Moreover, higher inflation reducing consumer spending power and seasoning of banks' loan books amidst a slowdown in lending growth will also contribute to an increase in problem loans to not less than 15% of gross loans this year from 11.4% at the end of 2014," adds Ms. Malyukova.