YEREVAN, October 9. /ARKA/. The development of the conflict in Nagorno-Karabakh could lead to devastating consequences for the banking sectors of Armenia and Azerbaijan, according to the review of the rating agency Moody's, published by RBC.

Analysts say the 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.

They warn that 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.

In both countries in the first half of 2020, amid the pandemic, there was already a downward trend in the volume of customer deposits, and measures were introduced to block it.

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).

The Moody’s review says that the ability of the government and the Central Bank to provide foreign exchange liquidity depends on gold and foreign exchange reserves, in comparison with Azerbaijan, Armenia's reserves are modest.

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, central banks can provide support to the sector. - 0--