S&P: In scenario of downward pressure building on manat exchange rate, domestic residents could quickly re-dollarize

Domestic deposit dollarization in Azerbaijan has notably declined in recent years, to 37% as of April 2024 from 55% before the pandemic, reads a report by the international rating agency S&P Global Ratings affirming Azerbaijan’s sovereign credit ratings, Report informs.

“We consider that a significantly higher average interest rate on national currency deposits of 8.4%, compared with 2.5% for foreign currency deposits, against the background of the stable exchange rate, and favorable, above-budgeted oil prices have improved the attractiveness of savings in manat. That said, we consider that in a scenario of downward pressure building on the manat exchange rate, domestic residents could quickly re-dollarize to hedge their inflation and foreign exchange risks,” S&P analysts noted.

“In our view, Azerbaijan’s banking industry continues to show signs of recovery from a protracted correction. After several years of stagnation, lending activity has rebounded since 2020 and we expect that the gradual easing of monetary conditions should support lending growth over 2024-2025. We think nonperforming loans (NPLs) could moderately increase to about 4% over the next two years, compared with 2.6% officially reported by the central bank at year-end 2023, as loan portfolios gradually season,” reads the report.