15 December, 2011

The National Bank of Georgia managed to tame the flamboyant inflation from 11.2% fixed at the end of 2010 within a year period to under the targeted 6%  and promises to keep the figure  in the first half of the coming 2012 and forecast slight increase that will be fluctuated around the target in the second half of the year. More challenges Georgian central bank will be addressing to in 2012 is further de-dollarization of Georgian banking sector and financial market

development. Of this and more macroeconomic features of Georgian economy Georgian Journal talked with Archil Mestvirishvili, Vice President of the National Bank of Georgia (NBG).

Q: Mr. Vice President, what are the achievements of the NBG this year and what challenges we face in the coming year?

A: The year of 2011 was quite active with 25% growth in credit portfolio that is a very decent figure. Our main challenge for the loans is to increase availability of credits that are long-term and with low interest rates; however it does not mean to interfere directly in the market. The key issue is to address underlined reasons behind it, which itself is a long term task. Interest rates with some fluctuations are declining in Georgia for the last several years, exemption was the crises period where we’ve seen interest rare spike, but soon declining trend has resumed.

The biggest impediment for low risk, long term and low interest rate loans is a high level of dollarization. Therefore we do reforms to develop financial markets, to increase awareness of financial risks, to activate local currency instruments, to increase macroeconomic stability, which will create favorable basis for irreversible and stable dedollarization. As we said before it is a long-term task, but we see results already. Dollarization of banking sector liabilities is lower than the lowest level exist before the crisis. Household loan dollarization is lowest as well, which is important as loans in Foreign Exchange (FX) increases loan servicing burden.

Q: What are the fundamental reasons of dollarization and how you think to alleviate the problem?

A: There is a perception that loans in foreign currency are cheaper than in national currency since the interest rates for dollar-nominated loans are on average 1-2% lower than in Lari. But FX loans have FX rates-related risks, which itself creates additional costs. To make the best decision we need to take into account FX risk, after which loans in GEL become more profitable.

Under the consumer protection framework banks are required to disclose to household possibility of an increase of actual payments in case GEL depreciates and loan is issued in FX. By increased awareness, much more households now prefer GEL loans.

As to business loans difference between loans in GEL and dollar is a cost of FX hedging. In nearest months our goal is to make market price of hedging more transparent. In other words, we want to develop liquid inter-bank forward market, where interested parties could clearly see the market prices. Hedging costs are constantly changing, now for the annual contract it is about 5-6%. Therefore although USD loan may be 2-3% cheaper, but with the FX cost GEL loan is the cheapest.

Banks also prefer to disburse credits in GEL to the businesses that operate in Georgia, because GEL loan is less risky for the borrower and bank has lower credit risk.  Making hedging interest rate transparent is not easy as it requires development of hedging market.

Q:  Business always has been complaining that development of hedging mechanism is impossible without developed securities’ market while our one is underdeveloped.

A: Government securities market is market that is necessary for financial development. Government started to issue Treasury bills since mid-2009 and since that Government securities market developed well and banks use Government papers intensively to manage their liquidity risk. We advise companies to be more active at this market, as using Government papers can help them in risk management, and therefore to increase profitability.

Q: How dramatically do you think this economic fall in the EU will be reflected on Georgia? Will financial resources get expensive to Georgian banks?

A:  An EU crisis has no direct impact on Georgia, as we don’t own sovereign debt of those countries and we don’t have strong financial dependence on the EU. It is unclear whether or not attracting of funds from international markets becomes more expensive for Georgian banks. On the one hand this increases uncertainty and risks, but on the other hand unlike 2008 crises that caused liquidity shortage now EU and US has an ample liquidity. Capital is moving to safer places and Georgia is now much safer than some of European countries. So how it will affect interest rates is really questionable.

Q: But if Euro and the US dollar depreciates it poses inflation risks, how do you plan to keep the target?

A: As it is most widely forecasted next year it globally will be low interest rate environment, with low commodity prices. For Georgia this means lower inflation rather than higher.  If Euro and US dollar depreciate the biggest risk to our market will be cheap imports that might create problems to our local production and export.

Q: Don’t you expect any complication in inflation for the elections of the year and increased expenses can affect targeted inflation rate?

A: We forecast inflation to be under the target of 6% in the first half of 2012 and to reach target by the second half. In general, all elections increase uncertainty in the economy that harms the business activity. In 2012 as planed in state budget, Government continues fiscal consolidation, which means that deficit will be farther reduced in 2012. So Government expenditure shouldn’t create problems for inflation, however general uncertainty remains.

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