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.