January 10, 2016
Our Macro Risk tool covers 70 frontier and emerging markets.
When Kazakhstan followed in Russia’s footsteps in floating its currency and letting it drop sharply in mid-2015, our risk “thermometer” indicated a build-up of serious imbalances and associated risks this had with other regional countries. As such, it was no surprise for us at OGR to see Azerbaijan devalue its manat currency in December 2015. The manat, which prior to 2015 had held steady for a decade, suddenly lost around half of its value, reaching the weakest exchange rate on record. With the price of oil plunging, our Macro Risk indicator signaled near-severe misalignment based on the fall in FX reserves, deteriorating terms of trade and weakening domestic demand.
The fundamentals of the manat exchange rate are quite similar to that of the Russian ruble or the Kazakhstani tenge, as the country is the third largest oil producer in the former Soviet Union. Economic history and the recent examples of CIS countries have proven it is nearly impossible for commodity exporters to maintain a pegged currency in times of dramatic terms-of-trade changes.
As oil prices remain near record lows, serious imbalances persist in Azerbaijan’s economy. The Macro Risk tool available to our clients keeps pointing at the risk of a potential further exchange rate adjustment and/or the necessity of an additional realignment of macroeconomic policies.
Andras Bence, economist at OGResearch