Standard & Poor's Global Ratings forecasts gradual improvement in Azerbaijan’s financial and banking system.
‘We believe that most risks for the sovereign from the weak banking system have already materialized, so we see additional contingent liabilities as limited. Even though the financial system remains weak, we forecast it will gradually strengthen in tandem with improved growth. We also view positively the recent improvements in supervision. A specialized banking regulator, FIMSA, has now been set up and has received additional resources to supervise and oversee banking risks. Monetary policy effectiveness remains significantly constrained by the weak domestic banking system, underdeveloped capital markets, high dollarization, and lack of operational independence by the Central Bank of Azerbaijan (CBA). Nevertheless, apart from setting the country's foreign exchange regime and making interventions, the CBA's ability to influence economic developments remains considerably constrained. We estimate that resident deposit dollarization remains at over 60%, which in our view severely limits the CBA's attempts to influence domestic monetary conditions. In addition, Azerbaijan's local currency debt capital market remains small and underdeveloped, while CBA's operational independence remains limited’, the agency reported.
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