IBA on Tuesday launched an offer to creditors that would exchange USD3.3 billion of its debt for around USD2.3 billion of new sovereign debt. Approval of the proposal requires the support of two-thirds of affected creditors at a claimants meeting tentatively scheduled for 13 July, APA-Economics reported.
The fall in oil prices, and subsequent economic slowdown and manat devaluation, has left Azerbaijan's already weak banking sector in a very fragile condition. IBA, the largest bank in the country, has also been affected by past mismanagement.
Other support mechanisms for the banking sector had been planned for 2017. The government injected AZN0.6 billion (0.9% of 2017 GDP) into IBA in early 2017, and the sovereign oil fund Sofaz budgeted an AZN7.5 billion (11% of 2017 GDP) transfer to CBAR in 2017 to support macro stability and the banking system as a whole. Under IBA's proposed restructuring, public debt to GDP would rise by around 6pp-7pp in 2017, bringing it to around 29% by end-2017 according to our projections. This is still much lower than the 'BB' category median of 51%.
But it is not clear that the planned restructuring would remove the need for further sovereign support for IBA. Azerbaijan's Financial Markets and Supervisory Authority described the restructuring plan as "a precursor to the provision of further support" from the government. The authorities have already guaranteed USD3 billion of bonds issued by Aqrarkredit early in 2017, which could be used to transfer additional bad assets from IBA's balance sheet upon completion of the restructuring plan, thereby adding up to 7% of 2017 GDP in contingent liabilities for the state.
The Negative Outlook reflects continued risks and uncertainty around the macroeconomic and financial sector adjustment under way. As IBA's restructuring effort proceeds, we will continue to assess the extent to which the materialisation of contingent liabilities stemming from the banking sector could erode the public finances or external asset position, the extent of stresses in the banking sector, and how these affect its ability to support economic activity.
Presentation on restructuring plan for investors is available at the following link:
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