VZCZCXYZ0018
PP RUEHWEB

DE RUEHKB #0023/01 0131350
ZNY CCCCC ZZH
P 131350Z JAN 09
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC PRIORITY 0600
INFO RUCNCIS/CIS COLLECTIVE
RUEHMZ/EUROPEAN POLITICAL COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 3208
RUEAIIA/CIA WASHINGTON DC
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEKDIA/DIA WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L BAKU 000023 
 
SIPDIS 
 
EEB FOR TIM GILMAN 
EUR/ERA FOR BENJAMIN ROCKWELL 
TREASURY FOR JEFF BAKER 
 
E.O. 12958: DECL: 01/12/2019 
TAGS: ECON EFIN ETRD EXIM EINV AJ
SUBJECT: IFIS WEIGH IN ON EFFECT OF GLOBAL FINANCIAL CRISIS 
IN AZERBAIJAN 
 
REF: 08 BAKU 863 
 
Classified By: Political-Economic Counselor Rob Garverick, Reasons 1.4 
(b and d). 
 
¶1.  (C) Summary:  In early December, EconOffs met separately 
with representatives of the EBRD, IMF, and World Bank in 
Azerbaijan who unanimously expressed confidence that the 
Azerbaijani economy and banking sector would be able to 
absorb the twin shocks of the global credit crisis and the 
sharp decline in energy export prices with only a modest 
decline in economic growth over the near term.  They did 
express some concern that the housing and construction 
sectors were vulnerable to a sharper downturn in the longer 
run if commercial banks continue to curtail real estate and 
consumer lending.  The financial experts noted that 
Azerbaijan may find budget implementation tricky this year. 
Inflationary pressures, which have been strong, may ease 
because of lower commodity prices.  The manat (currency) is 
likely to be stable, as Azerbaijan runs a current account 
surplus, has large reserves, and few debt instruments exist 
for potential speculators. Weaker currencies in neighboring 
states, particularly Russia and Ukraine, could lead to 
cheaper imports, putting a hurt on Azerbaijan's non-energy 
sector.  End Summary. 
 
International Monetary Fund (IMF) 
--------------------------------- 
 
¶2.  (C) On December 2 EconOffs met with IMF Resident 
Representative Koba Gvenetadze to discuss the economic 
outlook for Azerbaijan and other key issues.  The IMF expects 
some slowdown in Azerbaijan's economic growth due to the 
global credit crunch, as domestic commercial banks have cut 
back on providing consumer credit.  Gvenetadze indicated that 
the real estate market is particularly vulnerable, and has 
heard anecdotal reports that inventories of unsold apartments 
in Baku are on the rise.  He noted that because of the global 
credit crisis domestic banks will not be able to roll over 
outstanding external lines of credit, but that the total 
external credit currently held by Azerbaijani banks is small 
at 2.6 billion USD, of which 1 billion USD is due next year. 
Meanwhile, Azerbaijan claims its reserves exceed 18 billion 
USD, thanks to windfall oil profits. 
 
¶3.  (C) Gvenetadze said that the National Bank of 
Azerabaijan's December 1 decision to reduce reserve 
requirements was the third policy adjustment this year.  He 
believes the NBA has perhaps acted too quickly and might have 
been better off waiting to see the next set of inflation 
figures before injecting additional liquidity into the 
banking system.  He suggested that the reason for these 
proactive efforts might be due to pressure from commercial 
banks or because, as th central bank, the NBA has access to 
confidentia banking information which suggests the sector is 
under more stress than the GOAJ has been willing t admit. 
 
¶4.  (C) Regarding the budget, Gvenetadz opined that the GOAJ 
has not yet decided exactl how it will implement the budget 
in 2009, partiularly in terms of transfers to the budget 
from the State Oil Fund (SOFAZ) even though a notional amount 
had been announced.  (NOTE: The official budget was published 
on December 11, details reported septel.  End Note.)  He 
indicated that GOAJ officials are aware that budget 
flexibility in the year ahead will be necessary to handle the 
uncertainties related to fluctuating oil prices and the 
global financial crisis.  He said that non-oil economic 
growth will also be slowed by the reduction in government 
spending increases in 2009.  The key question will be what 
programs GOAJ will choose to cut. 
 
¶5.  (C) Gvenetadze anticipates that the fall in global 
commodity prices will allow 12-month inflation to register 
near 17 percent, down from an earlier estimated 21-22 
percent, for 2008.  However, he acknowledged that 
inefficiencies in the customs office are also likely to 
produce some stickiness in prices and will impede the 
transmission of lower import prices to domestic consumers. 
 
 
 
¶6.  (C) Gvenetadze stated that the IMF considers official 
GOAJ statistics on key macroeconomic variables such as GDP 
and inflation to be fairly accurate and worth using as 
indicators, although he commented that the data is by no 
means perfect.  He conceded that some data, such as that on 
labor and balance of payments are less reliable. 
Specifically, unemployment information is not particularly 
dependable because of the challenges of conducting surveys on 
a regular basis.  Balance of payments data is thought to be 
less reliable in part because remittances are difficult to 
estimate. 
 
European Bank for Reconstruction and Development (EBRD) 
--------------------------------------------- ----------- 
 
¶7.  (C) EconOffs met with EBRD Senior Banker and Head of 
Office Francis Delaey on December 4 to discuss banking and 
business conditions in Azerbaijan.  Delaey noted that the 
EBRD works directly with 9 banks in Azerbaijan, some of which 
are more vulnerable than others.  He confirmed that Unibank 
took out a 50 million ANZ loan from the NBA, and suggested 
that it may still need to borrow additional funds in 2009 to 
address liquidity issues.  He noted that other banks are in a 
better position but may need some help meeting liquidity 
needs.  Delaey does not consider the problems threatening 
Azerbaijan's economy and banking sector to be a direct result 
of the global financial crisis, but rather a peripheral 
development.  He expects the biggest threat to come from a 
sharp downturn in the real estate market, which would have 
repercussions on the banking sector. 
 
¶8.  (C) He remarked that most banks have become much more 
conservative, especially in consumer lending and mentioned 
rumors that obtaining consumer credit is increasingly 
difficult.  He suggested that, if true, this could negatively 
impact companies which rely on consumer credit for "big 
ticket" sales, such as car dealerships.  He also noted that 
many bank loans are secured by real estate and suggested that 
this could trigger a fall in real estate prices, as banks cut 
back on lending "perhaps exacerbated by the global credit 
crunch," which could precipitate a decline in housing prices. 
 Delaey said he expects the property market in Baku to 
undergo a substantial correction but suggested that even if 
that were to happen, the GOAJ could be in a position to buy 
up unsold apartment blocks from private developers and then 
offer this housing to civil servants andothers.  While not 
recommending complacency regaring the potential for a 
downturn in Azerbaijan'seconomy, Delaey implied that the 
situation wouldnot be as challenging as that in Kazakhstan, 
Ukrine, or Russia.  He flagged the potential for econmic 
issues in neighboring economies to affect Azebaijan's 
competitiveness and suggested that local non-oil sectors were 
already struggling because, with the ruble's depreciation, 
imports from Russia are now more competitive.  He offered 
milk as an example of a product where imports were more 
competitively priced than local products. 
 
¶9.  (C) According to Delaey, the EBRD plans to allocate 50 
million USD to the banking sector in 2009 and is interested 
assisting Azerbaijan's infrastructure development, but there 
are no such projects in the pipeline.  Part of the difficulty 
in winning project bids is that EBRD financing tends to be 
more expensive than commercial bank loans and the EBRD has 
conditionality requirements for procurement, etc.  In light 
of the global financial crisis, however, he expects that 
investors will find it more difficult to raise money from 
commercial sources and this may be an impetus for Azerbaijan 
to increase its engagement with IFIs like the EBRD. 
Nonetheless, Delaey said he doesn't think the GOAJ has yet 
fully realized how much the lending environment has changed 
because of the global financial crisis. 
 
World Bank 
---------- 
 
¶10.  (C) On December 15 EconOffs met with World Bank Country 
Manager Gregory Jedrzejczak and Senior Operations Officer 
Saida Bagirli to discuss recent macroeconomic developments 
and economic reforms.  World Bank officials say that they 
 
have been working with MoED, MinFin and NBA on modeling 
macroeconomic indicators, highlighting the difficulty 
theuncertainty of future oil prices adds to that task.  They 
believe GOAJ officials understand the 70 USD per barrel price 
assumption in the 2009 budget is likely overly optimistic. 
They commented that the oil price assumption really only 
influences how much of the budget is raised through taxes and 
that any decline in the flow of tax revenues into the 
budget will be offset by transfers from the oil fund, and 
that the GOAJ budget staff is really only concerned with 
planning expenditures.  They noted that the war in Georgia, 
the drop in oil prices, and global credit conditions have led 
to some confusion within the GOAJ about prudent macroeconomic 
policy.  Some officials have questioned them why GOAJ should 
curb fiscal spending when places like the US and Europe are 
embarking on massive fiscal stimulus packages.  World Bank 
officials stressed that as long as there is money in the oil 
fund, GOAJ has the luxury of keeping public spending high. 
 
¶11.  (C) The World Bank expects inflationary pressures in 
Azerbaijan to decrease as global prices for oil, steel, 
concrete and other commodities decline.  Jedrzejczak 
suggested that there is likely to be a struggle within GOAJ 
as some officials and influential business-people may be 
interested in keeping some of these prices artificially 
high.  He noted that there is an unofficial freeze on new 
construction in Baku although GOAJ officials are not likely 
to acknowledge this.  He said there have been anecdotal 
reports that some construction firms are having difficulties 
raising financing for projects, noting a collapse in the real 
estate sector would probably prompt GOAJ to buy up new, 
unsold apartments and essentially bailout housing developers. 
 
¶12.  (C) According to the World Bank, Azerbaijani banks are 
on relatively soundfooting, having largely relied on local 
sources f capital, and therefore are not significantly 
vlnerable to external exposure.  It does not forese a 
steep drop in the value of the manat as thereare no local 
public debt instruments which investrs could use for foreign 
exchange speculation.  he financial sector is not expected 
to experience problems in the near term.  However, 
there are risks in the real sector from a number of factors. 
These include oil prices, lower foreign remittances, and an 
increasingly uncompetitive environment where technology is 
weak and there are many informal, artificial monopolies. 
World Bank experts noted that a ruble devaluation could 
facilitate the importation of cheap Russian products which 
could prompt GOAJ to implement additional non-tariff measures 
at the borders. All of these factors, they noted, could lead 
to notable increases in unemployment. 
 
Comment 
------- 
 
¶13.  (C) The Azerbaijani economy is well-positioned to avoid 
a sharp contraction but growth is likely to experience some 
slowdown particularly in the non-oil sector.  However, there 
are considerable risks to this assessment as oil prices 
continue to be a significant point of uncertainty.  The 
near-term risks faced by the financial sector are limited but 
the real estate and construction sectors are in a more 
vulnerable position.  Although public expenditures in the 
2009 budget show a more modest 15 percent increase over last 
year, the reserves held by the State Oil Fund provide a 
funding source that GOAJ will probably increasingly rely upon 
to compensate for the decline in oil export revenues. 
SOFAZ's strong financial position will insulate the GOAJ from 
having to cut back drastically on planned expenditures in the 
near-term but ongoing transfers from SOFAZ to the general 
budget will probably continue to undermine the Fund's 
function as a reserve for future generations 
LU