SOFAZ unaffected by central bank’s currency regime - Shahmar Movsumov - INTERVIEW

SOFAZ unaffected by central bank’s currency regime - Shahmar Movsumov - INTERVIEW
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  • calendar-gray 08 February 2017

- How was the year 2016 for SOFAZ? How much revenues and expenditures did SOFAZ make last year?


As at end of 2016 SOFAZ’s budget surplus amounted to $500M


- SOFAZ’s activity in 2016 may be considered successful. In spite of low oil price and decline of oil revenues, Fund’s role in ensuring of financial stability in the country significantly increased. So, SOFAZ fulfilled budget transfers timely and continued to finance the infrastructure and social projects”, SOFAZ Executive Director Shahmar Movsumov said in his interview to APA-Economics.


According to him, the Fund made changes in its investment portfolio at the end of 2015 as a part of process to build a diversified investment portfolio for the long-term period: “According to these changes, the ratio between risk and profitability has changed in favor of more risky and profitable investment instruments. So, share of investments in real property in the investment portfolio doubled to 10%. At the same time, equity investments in the investment portfolio increased to 15% from 10%. As a result of these changes, investments in real property increased. Purchase of Palazzo Turati office complex in Milan ended in 2016. At the same time, investments in real estate funds significantly increased, investments were made in private share funds. Along with this, equity investments in the investment portfolio increased”.


He said that the oil price in the Fund’s 2016 budget makes up $25 a barrel: “As the oil price was higher than forecast in 2016, Fund’s revenues made up $5.9 billion or AZN 9.4 billion. At the same time, budget expenditures stood at $5.4 billion or AZN 9 billion. So, as at the end of this year, the budget surplus amounted to $500,000. Due to depreciation of currencies, which are included in the investment portfolio, against the USD, SOFAZ had extra-budgetary expenditure in the amount of $900,000,000, which caused $0.4 billion decline in SOFAZ assets compared to early 2016”.


- What is your forecast on SOFAZ assets for this year? 


- As you know, the oil price in SOFAZ budget for 2017 was approved at $40 a barrel. At the same time, the international organizations forecast oil price to stay at $40-60. Currently, the oil price fluctuates around $55. Taking all these into account, it’s possible to forecast that the assets will not sharply change at the end of this year in case budget expenditures are fully executed.


- Do the investments in real estate justify themselves and what are your expectations about profitability on these investments?


"SOFAZ’s investments in real property justified themselves, SOFAZ is studying opportunities to invest in real estates in several markets"


- As you know, SOFAZ invested in real estates in the cities such as London, Moscow, Paris, Milan, Tokyo, Seoul in Europe, Asia and Pacific regions. On the other hand, SOFAZ has started to invest in the leading real estate funds of the world since 2015.  In spite of lagging in real estate markets such as London and Moscow in 2016, a development was observed in the markets in which SOFAZ made investments. Taking these into account, we can say that SOFAZ’s investments in real property justified themselves


According to the statements of the world’s leading research institutions, the real estate markets are expected to grow this year. The countries in which we invested are also among those countries. However, it should be noted that as a non-liquid financial instrument the real estate demonstrates price changes in a short-run though it is characterized by stable financial flow from rental fee. Therefore, it’s impossible to exactly forecast the profitability on real estate portfolio. However, SOFAZ places emphasis on the long-term profitability indicators in real estate investments and currently, this index makes up 6-8%.


- In what countries does SOFAZ intend to invest in real property?


- SOFAZ is studying opportunities to invest in real estates in US, Europe, Asia and Pacific Ocean which have perspective and transparent market, promises profitability for investments. There will also be invested in real estate assets and funds in the future.


- How much did SOFAZ receive in dividends from VTB last year? What are the forecasts for this year?


"SOFAZ has received over $25M in dividends from VTB so far"


- In 2016, State Oil Fund of Azerbaijan (SOFAZ) has received 402,000,000 RUB ($6 million) in dividends from VTB. SOFAZ has totally received 1,200,000,000 RUB ($25.3 million) in dividends from VTB. The VTB prefers to pay stable dividends. However, the dividend policy is determined in accordance with the recommendation of Supervisory Board and decision of the Shareholder Meeting. And if there is any change in this policy, the amount of the dividends may change. 


- Can SOFAZ increase its share in VTB?


- SOFAZ has 2.95% share in VTB. In addition, SOFAZ does not currently intend to increase its share in VTB.


- How much did SOFAZ earn from Azeri-Chirag-Guneshli (ACG) and Shahdeniz fields last year? How much did the revenues decline compared 2015?


"Any specific currency regime set by the Central Bank does not affect SOFAZ’s investment directions”


- I’d like to note that crude oil price made up $41.9 in 2016 while it was $54.3 in 2015. This caused decline in revenues.  As a result of this, SOFAZ’s revenues from ACG and Shahdeniz fields stood at $ 5,164,200,000, which are $2 billion lower than 2015.


- Is any change expected on diversification of SOFAZ’s investment portfolio in 2017?


- As you know, SOFAZ’s investment strategy is carried out in accordance with the Fund’s Investment Rules and Policy. The strategy aims to preserve long-term purchasing power of the funds and increase the profitability. Taking these into consideration, it’s planned to continue diversifying the investment portfolio on both geographical and different financial instruments in 2017. Note that share of investments in financial instruments in the total portfolio increased. At the same time, share of equity investments is also planned to be increased in 2017.  


- How can the shift to floating rate affect the SOFAZ’s activity?


- As you know, major part of SOFAZ’s budget makes up expenditures in manat, as well as transfers to state budget and other payments. All receipts are in foreign currency, especially USD. It’s needed to convert these currencies to the manat in order to fulfil abovementioned obligations. The Fund regularly participates in the auction held by Central Bank in order to reduce impact of currency sale on the currency market and fulfil obligations timely. Along with the budget transfer of AZN 6.1 billion, AZN 7.5 billion is planned to be transferred to the Central Bank for the first time. At the same time, SOFAZ should save its funds for future generations. SOFAZ invested in foreign assets and central bank’s any specific currency regime does not affect its investment directions.  


- EBRDF has established Equity Participation Fund (EPF) jointly with Azerbaijan and China. EBRD ended the first stage of financing of the Fund. Chinese Currency Department invested €250 million in the Fund, SOFAZ invested €100 million. Will SOFAZ participate in the second stage of EPF financing and how much will be invested?


- "Equity Participation Fund" (EPF) carries out involvement of investors in several stages in accordance with the activity of funds operating on other private shares. There is no plan to invest in the Fund yet. To note that EPF’s purpose in the second stage is to find investors, but not attract funds from existing investors.


- How much can SOFAZ earn from EPF in 2017?


- If we take into account that EPF is in the stage of involvement of investors and making of new investments, no revenue is expected from this Fund in 2017. Additionally to note that EPF considered annual target profitability


- How much percent of investment portfolio is managed by domestic managers?


- As of December 31, 2016, 8.5% of SOFAZ’s investment portfolio is managed by foreign managers, 91.5% by domestic.

- How many and what financial organizations do manage the SOFAZ’s assets? May SOFAZ refuse to collaborate with any of the managers?  


- SOFAZ prefers to establish long-term partnership relationship with the financial organizations with which it cooperates. Currently, the Fund is cooperating with four foreign managers. Two of them (WB and Deutsche Asset Management) manage the portfolio on fixed-income securities, the others (UBS Asset Management and State Street global Advisor) manage the portfolio on shares. Fund has been in cooperation with each of these organizations at least for five years. SOFAZ has no plans to refuse these collaborations and new managers may be involved on management of share portfolio.


- Will the policy to save SOFAZ’s assets be pursued in 2017?


"Continuous increase of SOFAZ’s assets is our main goal”


- One of SOFAZ’s main goals is to distribute the oil revenues equally among the generations. Till 2015 SOFAZ’s funds increased, however, low oil price caused SOFAZ’s assets to decline.


One of the most important outcomes of 2016 was that SOFAZ’s reserves were saved.


On the other hand, increase of share of the assets promising high profitability serves increase of profitability of investment portfolio and assets.


- How much will SOFAZ put up for auction in 2017?


- SOFAZ’s budget expenditures in manat are mainly budget transfers and other payments. SOFAZ plans to put up for auctions AZN 6.1 billion in 2017.


- As is known, SOFAZ can place 5% of its assets in domestic markets. This  makes about $1.6 billion. SOFAZ placed $1 billion in IBA. Is there any plan to place $600 million in IBA or another bank?  


"No extra deposits are planned to be placed in banks"


- As you noted, SOFAZ can place 5% of its assets in domestic markets and placed $1 billion in IBA. However, SOFAZ has no any plan to place additional deposits in IBA or another bank.

- When will IBA start to fulfil its obligations? Did the bank appeal to SOFAZ to extend the period of the deposit?


- IBA is fulfilling its obligations before the SOFAZ and pays interests to SOFAZ per month. The bank did not appeal to SOFAZ to extend the period of the deposit.


- What kind of measures will be taken according to Action Plan of EITI International Board on Azerbaijan about corrective actions in 2017?


- As you know, Azerbaijan’s EITI status was today downgraded from ‘compliant’ to ‘candidate’ in 2015. According to EITI Board, Azerbaijani government had to take corrective steps on improvement of civil society. It’s fact that there a number of progresses in Azerbaijan after this decision. Most problems of members of civil society operating in EITI were solved. These facts led to EITI Board making decision to keep the country’s candidate status.


According to EITI Board’s decision, the next meeting will be held on March 8-9, 2017. Till the meeting, civil society should be involved in EITI process. In this direction, activities are planned to be carried out for facilitation of obtaining of grants from foreign donors. Several important steps have been taken in this regard. So, on October 21, 2016, Azerbaijani President signed a decree on application of “single window” principle in giving of grants by foreign donors in the country. These works are underway and other steps will be taken in a short run.


On July 26, 2016, the Board also decided to start evaluation on EITI in Azerbaijan. The activities to be evaluated include the steps on free participation of civil society in EITI process, rationalizing activity of EITI Multi-stakeholder Group (MSG), extension of information about activity of state organizations and improvement of statements.  


Azerbaijan has developed an Action Plan for timely solution of abovementioned issues and the measures will include these directions.


- You said at ADA University that a new economic model for post-oil period is needed. How will this new model differ from previous model?


- As you know, the oil price has fallen since 2014 and this caused decline in revenues. Therefore, upon the president’s decree, Strategic Road Map was approved and publicized. The Road Map defines development directions of the country and main target indicators have been chosen in accordance with this model.


- Earlier, the media outlets released citing to IMF that SOFAZ sold a part of its gold reserves. Are these reports true? How much do SOFAZ’s gold reserves make up currently and will they be expected?  


- As at the end of 2016, SOFAZ’s gold reserves made up 30.2 tonnes. Regarding abovementioned reports, I’d like to say that the gold reserves has been transferring from Central Bank to SOFAZ since 2016. In September 2016, 10.2 tonnes of gold were transferred to SOFAZ. So, the reports are untrue. Only 5% of SOFAZ’s funds may be invested in gold.


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