Manat from heaven? The Azerbaijan Example

Proshare

Wednesday, December 23, 2015 9:38 AM / FBNQuest Research

On Monday its central bank announced a major devaluation and movement to a currency float, citing the external shock of tumbling oil prices. Official reserves had slumped from US$13.2bn at the start of 2015 to US$6.2bn at end-November.

The impact of an earlier devaluation this year (in February) had been blunted by continuing oil price weakness.

The competitive edge of the economy has also been blunted by devaluations by important trading partners. Oil and gas account for 95% of exports, 75% of government revenues and 40% of GDP. The country in question is Azerbaijan, and the currency the manat. 

We anticipate calls for Nigeria to follow suit, as we saw with the devaluation of the Kazakh tenge in August. There are obvious parallels to draw in terms of economic structure but some marked differences too.


Oil’s share of GDP in Nigeria is just 10%, and it is therefore viable to rebuild the public finances on the basis of taxing the predominant non-oil economy. (Oil’s share of exports, in contrast, is unlikely to change much, given the size of the domestic market and the FGN’s import substitution policies).   


The Azeri budget for 2016 is based upon an average oil price of US$50/b whereas the FGN has initially proposed US$38/b.


Azeri reserves have taken a much larger hit than Nigeria’s although the country has a sovereign wealth fund with AUM in excess of US$35bn, which the authorities have tapped once this year.


Nigeria does not have core trading partners which have tumbling or devalued currencies, unlike Azerbaijan (Russia, Turkey and Kazakhstan).


Azerbaijan is highly centralized due to its Soviet heritage. President Aliyev may have deferred this latest devaluation until after the successful legislative polls on 01 November. In Nigeria President Buhari also secured a strong electoral mandate this year and has publicly congratulated the CBN governor for holding the line on the naira exchange rate.


Our position remains that the monetary authorities would devalue only as a last resort, an example being when the CBN is struggling to meet priority fx demand such as fuel payments. Were this to happen, which we expect at some point in 2016, a move to a floating regime would be a major surprise.


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