The International Bank of Azerbaijan – the country’s largest – has fared particularly badly amid the global slump in oil prices, which saw the country’s currency lose more than 50% over the past two years.
This left the IBA saddled with billions of dollars of bad loans, $3bn of which it is now hoping to restructure by offering creditors – which includes the national pension fund of Kazakhstan – an exchange for 20% less sovereign debt.
Samir Sharifov, the country’s minister of finance, said when the plan was announced that it was “essential” for achieving financial stability.
Fitch said that, if approved by the necessary two-thirds of affected creditors in July, this would increase public debt by 6-7 percentage points, to around 29%, by the end of the year, which would still be relatively low for the country’s credit rating.
“But it is not clear that the planned restructuring would remove the need for further sovereign support,” the ratings agency continued. “Azerbaijan’s Financial Markets and Supervisory authority described the plan as a ‘precursor to the provision of further support’ from the government.”
Costs could also rise further, it continued, noting that the state had already guaranteed $3bn worth of bonds as a result of IBA’s downfall earlier this year.
“[These] could be used to transfer additional bad assets from IBA’s balance sheet upon completion of the restructuring plan, thereby adding up to 7% of GDP in contingent liabilities for the state,” it said.
A similar process undertaken in 2015 and 2016 resulted in the state’s contingent liabilities rising by around 15% of GDP.
It highlighted the “continued risks and uncertainty” surrounding both the country’s economy and financial sector, and the potential consequences for the public finances if contingent liabilities were to materialise.
Azerbaijan’s government has already spent almost $6bn buying the bank’s toxic assets, only for its position to continue to deteriorate.
Earlier this month, IBA defaulted on a $100m loan payment, prompting the restructuring offer.
Announcing the plan, Khalid Ahadov, chairman of the board of the IBA, asked the bank’s partners for patience.
“I am hopeful that with the support of holders of our foreign currency obligations for our restructuring plan, the future financial viability of the bank can be assured,” he said.
But according to an article in Bloomberg, that support may be difficult to win. “Creditors are very angry about the haircut,” said Lutz Rehmeyer, who manages some of IBA’s bonds at Landesbank Berlin Investment.
