YEREVAN, July 15. / ARKA / Russia’s recession and the decline in global oil prices will affect banks across six CIS countries in 2015-16, says Moody’s Investors Service in a report, entitled “Banks in CIS feel pinch from Russia downturn and low oil prices,” published July 14. These factors are captured in the current ratings of banks in the six CIS countries covered in the report: Belarus, Kazakhstan, Azerbaijan, Tajikistan, Uzbekistan, and Armenia.
“We expect that CIS banks will be affected by lower oil prices and Russia’s recession through pressures on local currencies, declines in remittances from CIS nationals working in Russia, and lower exports from CIS countries to Russia,” says Lev Dorf, an analyst at Moody’s.
Moody’s expects a 3% contraction in Russian GDP this year followed by zero growth in 2016, based on Brent oil prices averaging $60 per barrel in 2015 and $65 next year.
CIS banks will primarily be affected through the impact of currency weakness in most CIS countries. The main problem arising from these foreign exchange devaluations is the banks’ large portfolio of loans denominated in foreign currency which, for the most part, are provided to borrowers with no foreign exchange earnings-, says the rating agency.
The devaluations and risk of further currency weakness weighs on banks by reducing the capacity of local borrowers — many of which do not have foreign-currency revenues – to service their foreign-currency loans; adding to liquidity pressures when depositors shift their funds to foreign currency; exacerbating currency mismatches between assets and liabilities; and inflating FX denominated risk-weighted assets, thereby pressuring capital levels.
In Moody’s view, currency pressures are the most acute for banks in Belarus, Tajikistan, and Azerbaijan, although they look likely to remain relatively contained in Uzbekistan, whose banks benefit from a tightly controlled currency regime under which the som is gradually devalued against the US dollar.
Under its central scenario for a 20% further devaluation in the Kazakh tenge by the end of 2016, Moody’s expects that banks in Kazakhstan will face more pressure than those in Uzbekistan, but somewhat less pressure than banks in the worst-affected CIS countries. Armenia is also moderately affected, reflecting the relatively modest devaluation in the dram, but its highly dollarized banking sector will face increased asset quality pressure if the dram continues to depreciate.
The drop in remittances from CIS nationals working in Russia — which dropped by 47% year-over-year in US dollar terms to $1.9 billion in Q1 2015 — poses another major challenge for banks, primarily in countries such as Tajikistan, where remittances comprise a very large proportion of GDP.
As the streams of regular remittances that have supported local consumer incomes dry up, banks’ loans to individuals and SMEs that depend on sales of goods and services to consumers will see their performance deteriorate, says Moody’s.
In terms of trade linkages, the rating agency expects that weakness in Russia’s economy will affect Belarusian banks most severely. The sharp drop in Belarusian exports to Russia in the first quarter of 2015 is a significant negative indicator for the asset quality of Belarusian banks, in Moody’s view.
In addition, lower oil prices have negatively affected economic activity in Azerbaijan and Kazakhstan, which will lead to deteriorating asset quality, although continued spending by the governments of Azerbaijan and Kazakhstan will mitigate the impact to some extent. -0-
