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Manat slides as Azerbaijan’s central bank decides to abandon currency peg

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 21, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - The central bank of Azerbaijan abandoned its currency peg and floated the manat. Back in February, the central bank governor had told FT of its intention to do away with the currency peg. Governor Elman Rustamov had said, “We consider that we should transit to a more flexible exchange rate regime and gradually we will transit to an inflation-targeting regime.” The currency had been pegged to the dollar since mid-2011. The future value of the manat, the central bank said would be “determined by demand and supply on the forex market”.

    This decision marks the manat’s second devaluation in 2015 and is in line with Kazakhstan’s August’s decision to float of its currency in August. In February when the central bank moved towards a dollar-euro basket and thus changed the way it priced its currency. The manat’s value had then shot up from 0.78 per dollar to 1.04 per dollar. However, today the value fell to 1.55 per dollar following the central bank’s decision to abandon its currency peg. The manat will likely end the year as the worst performing currency.

    The central bank’s need to abandon the currency rises from the low oil prices which has been hurting the economy dependent largely on its revenue garnered from the energy sector. Oil and gas sector account for 95 per cent of the country’s exports. Also, 70 per cent of government revenues come from this sector. The price of Brent crude today hit a new 11-year low as oil was priced at just $36.18 per barrel. This slump in oil price was weighing on Azerbaian’s energy centric economy.

    Azerbaijan’s reserves fell sharply from $13.8bn at the start of the year to $6.8bn in October, on dismal oil prices. The fall in reserves forced the country to resort to the $35bn sovereign wealth fund, which was left untapped since it was founded in 1999.

    Positives and Negatives

    The sharp currency fall which has resulted from the central bank’s decision will likely help the economy to balance its books. It will reduce cost of operation for the country’s important oil sector. However, the move will negatively impact Azerbaijanis with salaries, pensions and savings in manat. Individuals and companies have rushed to convert their deposits to dollars upon receiving the news of central bank’s decision. As a result, a huge difference got created between banks’ loans and deposits, thereby hurting the banking sector of the country. The government has assured that measures would be initiated to cushion the banking sector. No details were however provided on the steps that the central bank is planning to take.
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