The economy of Azerbaijan has already been adversely impacted by the pandemic and lower oil prices this year, APA-Economics reports citing the statement of S&P Global Ratings Agency.
"Low oil prices will further weigh on Azerbaijan's economic growth prospects. Combined with high sensitivity to potential currency depreciation, this exposes the banking sector to high economic imbalances and increases the pressure on asset quality.
For 2020, we expect that Azerbaijani banks' new lending will slow. Meanwhile, credit costs will likely increase to 4.0% of the average loan book, compared with an average of 3.2% over 2015-2019.
We assume that reported NPLs may rise to 12%-15% in 2020-2021, from about 8% at year-end 2019. At the same time, we believe that the peak in NPLs and the bulk of asset quality deterioration could crystallize only in 2021. Thus, the impact on Azerbaijani banks' profitability from additional provisioning could be deferred over 2020-2021.
Steep depreciation of the Azerbaijani manat over the past few years has led to protracted currency imbalances between banks' assets and liabilities, due to the increased share of foreign currency funding in banks' customer funds (more than 60%). The exchange rate remains under pressure in a volatile macroeconomic environment. Disorderly adjustments to parity might destabilize the macroeconomic environment and increase credit risks in the banking sector. We understand that, so far, domestic resident savings have not been converted to foreign exchange at an increased rate, nor have there been substantial outright deposit outflows from the banking system," the statement reads.