At the end of December 2015, the central bank decided to let its currency, the manat, float free and hence to give up on the peg to the USD. As a result, the exchange rate against the USD depreciated by more than 45%. The move followed a devaluation of the manat by 33.5% in February 2015 (cf. graph). As oil exports represent more than 80% of the current account receipts, the move was triggered by the 11-year low the oil prices reached by the end of December 2015. Oil prices are expected to remain low for an extended period. That being said, the ongoing tension in the Middle East could lead to a surge in oil prices as seen in recent days.

Impact on country risk

The sharp depreciation of the manat is likely to increase inflation pressures and hence trigger social discontent. In order to stem social unrest, the authorities could adopt measures such as the introduction of price controls. The sharp depreciation also has a negative impact on commercial risk as the cost to reimburse the debt denominated in foreign currency increased. This is of particular concern for Azerbaijan’s economy as the banking sector is heavily dollarised. Hence, the quality of the banking sector assets is likely to deteriorate. As a consequence, the banking sector could obstruct access to credit. On the positive side, the decision to leave the manat free-floating means that the monetary authorities no longer need to use their foreign exchange reserves – which were under pressure – to support the manat. The short-term political risk, which represents the liquidity, is hence likely to remain stable in the coming months.


Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com