The FINANCIAL — Out of a total GEL 13.6 billion, GEL 9 billion of Georgian deposits is denominated in a foreign currency. Deposits denominated in USD have increased by 5.6% as of July 2015, in comparison with the prior year. The dollarization rate of loans has decreased by 2.4 percentage points for the same period. Total reduction of the dollarization ratio stood at 1 percent this year.
The deposit portfolio at commercial banks has reached GEL 13,698,279 thousand as of 1 July, 2015. The figure has increased from GEL 10,978,796 thousand from the same period of the previous year. In total GEL 4,714,702 thousand (or 35%) is made up by deposits denominated in the national currency. The remaining 65% (or GEL 8,983,577 thousand) has been made up by foreign currency deposits.
“The dollarization ratio as of 1 July, 2015, in comparison with the same period of the previous year, has increased due to the revaluation of the exchange rate fluctuations. Without the effect of the exchange rate, dollarization has decreased by about 1 percentage point. The further change of the dollarization rate till the end of the current year will depend on further change of the exchange rate and the expectations of the population. If there will not be any additional significant change of exchange rate, dollarization will be maintained at the same level,” Irakli Barbakadze, Economist at Policy and Management Consulting Group (PMCG), told The FINANCIAL.
The volume of deposits has increased by GEL 2.7 billion as of 1 July, 2015, in comparison with the prior-year period. Although, as Barbakadze explained, currency exchange rate change makes up a large proportion of this enlargement. In his words, deposits denominated in a foreign currency have increased by 34.1%, while USD-denominated – by 5.6%.
“Accordingly, there is no danger of a dollarization ratio increase in deposits,” he added.
According to the data of the National Bank of Georgia (NBG), the total deposit portfolio has jumped from GEL 10,978,796 thousand as of July 2014, to GEL 13,698,279 thousand as of July 2015. Comparative data shows growth of the deposit portfolio by 2,719,483 thousand. Out of this sum, GEL 2,286,334 thousand (or 84%) has been made up by savings denominated in foreign currencies. The remaining 433,149,000 (or just 16%) has been made up by savings in the national currency.
Despite the recent decline of the dollarization rate in the Georgian economy, foreign currency has always been preferable and more trusted for the local population. Dramatic devaluation of the GEL since 2014 has stimulated this distrust. There are several factors that keep dollarization at a high level in Georgia. Firstly, Georgian households trust the US dollar more than GEL as a store of value. Thus they prefer to save in foreign currencies. Secondly, durable goods (real estate, cars, etc.) are typically priced in USD and people are accustomed to using USD as the de facto unit of account.
According to Maya Grigolia, Coordinator and Leading Instructor in ISET’s training programme for the banking sector, the extent of aggregate currency mismatch on Georgia’s balance sheet is closely related to the process of its integration into the global financial system. In her blog “Does Georgia Need its Own Currency”, published in 2013, Grigolia said: “several years ago, most Georgian banks were owned by individual local investors. Now, foreign banks and holdings are majority owners in large domestic banks, while other institutional investors are represented in the ownership of various Georgian banks. Such a trend in ownership structure reflects increasing trust in the Georgian economy on the part of foreign investors and an opportunity to integrate into the global financial markets.”
“Indeed, the Georgian banks are now able to borrow from foreign wholesale markets and in order not to face the currency mismatch problem on their balance sheets, they also prefer to lend in a foreign currency (and, consequently, receive revenues in a foreign currency). The result is the persistence of high levels of loan dollarization,” said Grigolia.
The GEL exchange rate has been quite stable over the past decade (excluding the post 2008 war’s devaluation by 20%). Its first dramatic depreciation happened at the end of 2013 when USD 1 was boosted from 1.65 to 1.74 against GEL 1. December 2014 was another shock for the Georgian national currency. The GEL started depreciating against the USD and saw a drop from an average 1.75 to 1.92. There were no relieving months in 2015. The population went into a panic when observing the daily depreciation of the national currency. With 2.37 per USD 1, the Georgian Lari has returned to the ratio that was shown in 1999.
“During devaluation of the currency, the dollarization ratio of loans has more of an impact on the population and accordingly, the economy. As of 1 July, 2015, the dollarization of loans has been reduced by 2.4% in comparison with the previous year,” said Barbakadze.
“The stability of income in the national currency is the main basis for the reduction of the dollarization ratio. It can be achieved with low inflation and a floating exchange rate. However, this is not a short-term process and will take several years. During this period, the fiscal and monetary policies should be consistent and should maintain macroeconomic stability,” Barbakadze suggested.
Georgian commercial banks have issued GEL 14,884,807,000 as of 1 July, 2015. The loan portfolio has been increased by GEL 3,664,699,000 from the prior-year period.
Loans issued by commercial banks in the foreign currency, depicted in GEL, have increased by 40% as of 1 July, 2015, in comparison with the same period of the prior year. Meanwhile, loans depicted in USD have increased by 10.2%.
“It is also noteworthy that the growth rate of dollar-denominated foreign currency loans has decreased. The trend is not increasing but decreasing. In addition, as noted above, the dollarization rate of loans decreased by 2.4 percentage points,” Barbakadze said.
In order to avoid FC shocks, Grigolia, ISET, suggests that first of all, most obviously but unrealistically, Georgia can decide not to borrow in a foreign currency. “An autarchic financial market will face no currency mismatch problem because it will have no external debt. This response, however, clearly has its costs. Georgia will forgo all the benefits associated with borrowing: additional investment finance and consumption smoothening.”
“Secondly, the National Bank of Georgia and the Georgian banks can try to increase GEL-denominated liabilities, i.e. deposits with local banks. This would enable banks to denominate their loans in GEL while avoiding foreign exchange-related credit risks. How can this be achieved? One way is to increase public confidence in the local currency. Importantly, greater confidence in GEL can act as a self-fulfilling prophecy. By increasing their GEL savings, Georgians will indeed make the country’s financial system less vulnerable to currency-induced credit risk,” she said.
“Finally, Georgia could introduce a fixed exchange rate regime managed by a “Currency Board”, as has been done by Estonia. An even more credible version of the same policy would be to abolish the local currency and adopt the Euro or USD as the main legal tender in the country. This would simply do away with inflation, devaluation and the currency risk problems. The main risk for a country adopting such a policy is in losing the ability to use inflation and devaluation of the national currency as a means of reducing local production costs (salaries) vis-à-vis the rest of the world. An argument could be made that having such an ability could make the country less vulnerable to shocks in aggregate demand,” said Grigolia.