SOVEREIGN DEBT MANAGEMENT FORUM 2016 DEBT MANAGEMENT STRATEGIES FOR - PowerPoint PPT Presentation

SOVEREIGN DEBT MANAGEMENT FORUM 2016 DEBT MANAGEMENT STRATEGIES FOR COMMODITY EXPORTERS: WHAT ARE THE LESSONS OF THE PAST YEAR? AZER MURSAGULOV DEPUTY DIRECTOR OF PUBLIC DEBT MANAGEMENT AGENCY OF AZERBAIJAN MINISTRY OF FINANCE

Azerbaijan economy during commodity boom era Oil GDP growth rate 40% GDP per capita, USD Non-oil GDP growth rate 85% 34.5% 7,977 7,991 GDP growth rate 7,594 7,285 30% 26.4% 25.0% 66.3% 63.2% 65% During 2003-2014: 5,922 20% 5,603  GDP grew by more than 3 5,018 9.3% times 45% 10% 5.8% 11.2% 10.8% 5.0% 10.2% 36.8%  GDP per capita grew 9 times 0.1% 3,482  Azerbaijan – upper middle 2.8% 0% 2.2% 25% 15.9% income country 2,472 14.9% 13.6% 13.9% -10% 8.3% 11.9% 11.4% 9.4% 9.6% 9.9% 1,590 7.9% 3.9% 6.8% 6.9% 3.0% 3.7% 5% 1,049 0.9% 1.8% 889 -20% -2.9% -5.1% -9.8% -15% -30% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Oil Fund Reserves 33% Central Bank Reserves 28% 14 27% 14 26% 23% 22% 12 17% 17% During 2003-2014: 14% 10  Significant oil revenues 37 transformed into high current 1% 36 6 34 account surplus and 30 -4% -5% substantial reserce -7% -9% -9% -9% 5 -9% accumulation 23 6 -14% -17% -18% 15 11 -28% 5 5 5 -30% 3 Current account/GDP 2 -32% -35% Capital & Financial account/GDP 2 1 1 1 1 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Azerbaijan economy during commodity boom era Total public debt/GDP 49% 46% 45% 21% 41% 41% 40% 39% 20% 28% 26% 26% 25% 23% 17.4% 13.7% 14% 10.9% 13% 13%  During these years government 13% 12% 12% 4.2% 2.7% 1.7% 1.8% 0.7% 2.8% 1.6% 11% 6.2% 2.3% 11% accumulated strong fiscal balance while maintaining low Debt/GDP 8% 7% -22% -22% -24% -25% -26% -31% -32% -34% -34% Consolidated budget revenue/GDP -36% -37% -39% Consolidated budget expenditures/GDP Consolidated budget surplus(deficit)/GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Share of oil in GDP Export of goods: Main Commodities Share of non-oil in GDP 66% 52% 43% 51% 48% 60% 67% 40% 47% 52% 56% 41% Other export Oil products 5.8% 8.0% Natural gas 1.8%  Despite all these achievements, Non-hydrocarbon 12.6% oil and gas still remain central for 60% 59% the economy 57% Fresh fruits and 53% 52% Tea 0.2% vegetables 2.7% 48% 49% 48% 44% Aluminium 0.6% 40% Sugar products Vegetable oil 34% 33% 1.9% 0.5% Iron products Oil 77.6% 0.1% Margarine 0.4% Electricity 0.1% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cotton 0.2%

Lower oil prices, weak regional growth, currency devaluations of main trading partners and contraction in hydrocarbon production have impaired economic performance in Azerbaijan Current account/GDP Oil GDP (YoY%) 16.7% Non-oil GDP (YoY%) 9.9% Capital & Financial account/GDP Real GDP (YoY%) 13.9% 6.9% 5.8% 2.1% 2.8% 1.2% 1.1% 0.9% -0.42% -2.10% 1.1% -4.5% -5.82% -8.8% -2.9% -3.4% -6.1% -17.11% 2013 2014 2015 2Q,2016 2013 2014 2015 2Q,2016 44.6% 40.2% 39.1% 38.7% 38.5% 36.3% 33.9% 27.6% As a result of external shocks:  GDP contracted sharply  Current account and government budget surplus have turned 2.8% 1.7% negative -4.8% Consolidated budget revenue/GDP -16.9% Consolidated budget expenditures/GDP Consolidated budget surplus(deficit)/GDP 2013 2014 2015 2016 Projection

Lower oil prices, weak regional growth, currency devaluations of main trading partners and contraction in hydrocarbon production have impaired economic performance in Azerbaijan FX Deposits SOFAZ, bln USD AZN Deposits CBAR,bln USD 18% 20% 13.8 14.152 4.3 50% 51% 5.0 81.64% 80.21% 37.1 35.9 35.1 33.6 49.89% 49% 2013 2014 2015 2Q,2016 2013 2014 2015 2016 USDAZN 1.8291 EURAZN 1.8378 1.69 1.685 1.7118 1.8057 1.7201 As a result of external shocks: 1.195  With high dollarization and 1.1805 1.1394 1.637 1.6411 1.527 1.55 1.5082 SOFAZ assets decreasing, 0.9065 0.8934 1.5094 1.6124 1.5054 1.05 economy has undergone twofold 1.0467 1.0473 1.0499 0.7844 0.7862 devaluation 05.01.2015 19.01.2015 03.02.2015 17.02.2015 03.03.2015 18.03.2015 08.04.2015 22.04.2015 06.05.2015 21.05.2015 05.06.2015 22.06.2015 07.07.2015 23.07.2015 06.08.2015 20.08.2015 03.09.2015 17.09.2015 05.10.2015 19.10.2015 02.11.2015 17.11.2015 01.12.2015 15.12.2015 29.12.2015 15.01.2016 01.02.2016 15.02.2016 29.02.2016 15.03.2016 05.04.2016 19.04.2016 03.05.2016 18.05.2016 02.06.2016 17.06.2016 04.07.2016 20.07.2016 03.08.2016 17.08.2016 31.08.2016 16.09.2016

Government acted swiftly with a number of offsetting measures Adjustments to the monetary policy  Twofold devaluation  Shift to managed floating exchange Adjustments to the fiscal policy rate regime  Tightening of monetary policy and  Counter-cyclical stimulus tailored Structural changes preparation to gradual shift to to promote growth and protect  New strategy to rapidly diversify inflation targeting vulnerable population (increase in  Restructuring of the banking sector the economy by creating more (public sector wages, overall  Blanket guarantee of deposits business friendly environment and pensions and social protection  Macro prudential limits on FX pursuing structural reforms. expenditures)  Establishment of Financial Market lending  Capital expenditures were Authority downsized.  Improved administration of tax and  Growth friendly fiscal customs collections consolidation going forward  Government stimulus to private sector non-oil exports  Government stimulus to foreign investment

Public Debt Profile of Azerbaijan - Overview 14.0 External debt/GDP Domestic debt, mln USD 12.4 Total public debt/GDP External debt, mln USD Total Domestic Domestic debt/GDP Total public debt, USD Debt 12.0 38% 10.7 32% Eurobond 9.6 9.4 9.3 10.0 10% 7.6 21% 7.4 20% Contingent 20% 8.0 Liabilities 6.7 Development 34% 7.7 5.7 14% 13% loans 20% 13% 13% 5.5 6.1 12% 12% 18% 11% 6.0 18% 27% 11% 7.4 8% State guaranteed 15% 4.7 7% 4.8 8% 8% 3.9 7% 7% 12% loans 12% 8% 3.9 3.5 10% 2% 4.0 9% 3.4 3.3 2.8 7% 6% 3.0 2.8 1.8 2.3 2.6 6% 6% 5% 5% 5% Commercial Contingent 4% 1.7 2.1 1.9 3% 1.5 2% loans 2% Liabilities 1% 1% 2.0 1% 3.0 1% 9% 2.4 14% 1.3 2.0 Obligations to 1.6 1.7 0.3 0.5 Central Bank Total External 0.2 0.3 0.2 0.2 2% Debt 0.0 Funds, 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2Q,2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2Q,2016 62% 1% Government bonds 1% Variable interest USD EUR SDR AZN Others over 20 years 22% rate 27% 3% 3% 3% 3% 8% 9% 10% 15 - 20 years 6% 18% 26% 28% 10 - 1 5 years 14% 35% 28% 8% 35% 35% 7- 10 years 34% 6% 5% 16% 8% 5% 14% 12% 5 - 7 years 13% 11% 10% 12% 19% 2- 5 years 9% 16% 1 - 2 years 1% 20% 55% 52% 50% 46% 6 months - 1 year 1% Public Debt Maturity Structure 37% Fixed interest rate 30% 23% 73% up to 6 months 1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2011 2012 2013 2014 2015 1Q2016 2Q2016

Public Debt Profile of Azerbaijan - Major Issues Increase in costs and risks of public debt management: need for new strategy with increased focus on new market macroeconomic volatility need for context and more diverse challenges debt portfolio increasing borrowing needs

Integrating public debt management into broader macroeconomic framework Financial Stability Board  FX and depreciation pressures  Domestic market liquidity pressures  Focus on short term inflation targeting Monetary  Policy measures via government bond market Policy Debt  Need for financing for strategic projects Strategy and capital spending and economic  Debt sustainability in the growth  Structural fiscal balance financing context of achieving pressure monetary and fiscal stability Fiscal Policy

Priority strategies of debt management in light of new macroeconomic challenges Medium term perspective Government closely collaborating with WB Government closely on: Coordination with collaborating with Managing market  Improving overall macroeconomic IMF on: and refinancing risk debt management  Medium term policies structure fiscal framework  Medium term debt  Rule based fiscal management regime strategy  Close coordination  Managing market between monetary risk more efficiently and fiscal policies  Government bond market development Focus on domestic borrowing an Managing government bond contingent liabilities market development