Thursday, October 8 2020 20:07

ArmInfo. The escalation of the conflict in Nagorno-Karabakh may lead to the withdrawal of deposits in the banks of Armenia and Azerbaijan and the weakening of the dram and manat, Moody's said.

The conflict is already affecting the recovery of the  economies of countries from the coronavirus pandemic, RBC reports.  The development of the conflict in Nagorno-Karabakh could lead to  "devastating and far-reaching consequences" for the banking sectors  of Armenia and Azerbaijan, according to a review by the rating agency  Moody's. The conflict is already affecting the recovery of the  economies of countries from the coronavirus pandemic. Increased  tension in the region will reduce economic activity and consumer  confidence in both Armenia and Azerbaijan, which will impede the  recovery of both countries from the consequences of the coronavirus  pandemic, analysts say. Although while banks in these countries are  operating normally, the intensification of the conflict could lead to  an outflow of deposits, increased risk to liquidity and a weakening  of national currencies, Moody's warns. At the same time, in both  countries in the first half of 2020, against the background of the  pandemic, there was already a downward trend in the volume of  customer deposits, and measures were introduced to prevent it.  According to the agency, the historical dynamics of liabilities shows  that the population's deposits in Azerbaijani banks decreased by 25%  in 2015-2017 due to the fall in oil prices and the 50% devaluation of  the local currency against the dollar. There were no large-scale  outflows of deposits in Armenia during this period.

Withdrawals of dollar deposits may lead to the fact that banks will  face a shortage of foreign exchange liquidity to meet their needs  (more than 50% of deposits in Armenia and Azerbaijan in foreign  currency), writes Moody's. "The ability of the government and the  Central Bank to provide foreign exchange liquidity depends on gold  and foreign exchange reserves, compared with Azerbaijan, Armenia's  reserves are modest," the review says. Finally, due to the high level  of dollarization, the banks of both countries are sensitive to the  weakening of their national currencies. Further escalation may put  pressure on the dram and manat rates, which will lead to losses on  any open foreign exchange positions and reduce the profitability of  banks. As of July 2020, Moody's estimates liquidity reserves at 34%  of all banking sector assets in Armenia and 48% of sector assets in  Azerbaijan. In addition to this, Central Banks can provide support to  the sector.