MAY 16 2017 (The Conway Bulletin) — Ratings agencies downgraded debt issued by the International Bank of Azerbaijan, as the country’s biggest bank appeared to teeter towards a collapse.

There were fears too that the bad debt piling up at the IBA may damage finance systems across Central Asia and South Caucasus after it emerged that Kazakhstan’s Single Pension Fund had bought $250m of IBA debt over the past few years.

Kazakh MPs accused the Pension Fund of incompetence for investing in IBA in October 2014 shortly after the price of oil started to fall. At the time analysts warned that IBA was at risk of accumulating mountains of bad debt that could sink it.

Moody’s said it had downgraded IBA’s rating to Caa3 from B1, effectively shifting IBA debt from risky to extremely risky.

“Moody’s expects the announced foreign debt restructuring plan to result in credit losses for creditors in excess of 20%,” it said. Media reported that Cargill and Citibank are two of IBA’s biggest creditors.

Last week, IBA filed for Chapter 15 protection in the United States after it failed to make a $100m debt repayment to Netherlands-based Rubrika Finance on May 10. Chapter 15 prevents creditors going after IBA while it restructures its $3.33b debt. The Azerbaijani government is the bank’s biggest shareholder, now holding an 80% stake, and its fall is a major embarrassment to it. Not only has it bought equity in the bank, it increased its stake from 55% earlier this year, but it has also spent nearly $6b buying up its toxic debt.

Media quoted IBA chairman, Khalid Ahadov, as saying that its restructuring plan will be presented in London on May 23.

“Upon completion of these measures, the Bank’s capital position will return to regulatory frameworks,” he was quoted as saying. “As a result of all those measures long-term financial sustainability of IBA will be ensured that will increase its market value on the threshold of privatisation.”

But the reputational damage inflicted by the near-collapse of IBA will undermine Azerbaijan’s status in the financial markets. Last year several smaller banks collapsed or had their license withdrawn by the Central Bank. In 2015, the Azerbaijani manat was devalued twice, halving its worth. With many mortgages and personal loans given out in US dol- lars, consumers found it near-impossible to service their debt.

Azerbaijan has been particularly hard hit by the fall in oil prices. Its economy is reliant on oil exports. Despite repeated warnings, it has failed to diversify.

ENDS

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(News report from Issue No. 329, published on May 20 2017)