Central bank withdraws currency support amid declining oil prices Event At the end of Decemberthe central bank decided to let its currency, the manat, float free and hence to give up on the peg to the USD.
The move followed a devaluation of the manat by Oil prices are expected to remain low for an extended period. That being said, forex oil price ongoing tension in the Middle East could lead to a surge in oil prices as seen in recent days.
Impact on country risk The sharp depreciation of the manat is likely to increase inflation pressures and hence trigger social discontent. In order to stem social unrest, the authorities could adopt measures such as the introduction of price controls.
The sharp depreciation forex oil price has a negative impact on commercial risk as the cost to reimburse the debt denominated in foreign currency increased. Hence, the quality of the banking sector assets is likely to deteriorate.
As a consequence, the banking sector could obstruct access to credit. On the positive side, the decision to leave the manat free-floating means that the monetary authorities no longer need to use their foreign exchange reserves — which were under pressure — to support the manat.
The short-term political risk, which represents the liquidity, is hence likely to remain stable in the coming forex oil price. Pascaline della Faille, p.