Banking supervision in Georgia became stricter on 1 October, when the liquidity norm increased from 20% to 30%. These indicators had been reduced in September 2008. However let’s remind ourselves of the tendencies that were illustrated in the Georgian banking system over the past two years.
The Georgian banking sector finished the year 2008 with loss of 215 million GEL, the year 2009 ended with loss also. There was the Georgian-Russian war and the beginning of the financial crisis in 2008, so against this background naturally there was reduction in the banking sector’s assets – by 12%, which consisted of 1.026 billion GEL.
Since the beginning of the year 2009, with the support of international financial institutions, IFC and EBRD, partly managed to relieve the problem’s acuteness. This support included coverage of due date external liabilities for leading Georgian banks. Since the year 2010 we have already had clear positive tendencies.
The assets of the banking sector increased by 19% in a 9 month period compared to the beginning of the year 2010, and by 25.3% compared to the same period of the previous year, reaching 9.8 billion GEL in total. This is a historical maximum and is 10.9% or 970 million GEL more than the pre-war indicator.
For the first time since after the year 2008, from the beginning of the year 2010, banks’ credit portfolios have been increasing monthly. In total their capacity increased by 12.7% in a 9 month period in 2010. However, the level still falls behind the pre-crisis indicator.
There has been a tendency of improving credit portfolio quality over the last year. Whereas for the same period of last year the loan possible loss reserves relative to credit portfolio was 13.1%, today this equals 11%.
It should specially be noted that there has been an increase in deposits of individuals and legal entities (except bank deposits) in the last year. The deposits of legal entities increased from 1.65 billion GEL to 2.60 billion GEL (57.4% increase) in the last 12 months. The deposits of individuals increased from 1.84 billion GEL to 2.55 billion GEL in the same period. This indicator is of historic maximum and the growth rate is of 38.7%.
During the year 2010, all months apart from January were successful for banks according to the final financial indicators. Banks’ total gross profit reached 95.3 million GEL in the 9 months of 2010. The quantity of unprofitable banks was significantly decreased. Compared to the same period of the previous year their number was reduced from 14 to 7.
These are the tendencies which we have seen in the Georgian banking sector over the last two years.
Let’s return to September 2008 when liquidity norm reduced and now it is returning to the old indicator. This was the result of those factors which we mentioned above. Against the background of war and crisis the goal of the National Bank was to increase banking activities, causing ascending tendencies in credit systems. I believe it was the right decision when Central Bank reduced these norms and demands at that time.
Today we have improved conditions and due to that fact Central Bank is increasing the demands and returns to old indicators. This is an increase of the liquidity indicator, sharpness of adequate indicators of capital, which on its side is a vital and integrated indicator of financial stability. I believe that with this information we can understand why Central Bank is returning indicators to that of pre-September 2008 condition.
Inflation
The main goal of National Bank is to sustain the stability of prices and it is trying to use all accessible leverages to restrain inflation and return the index to the forecasted indicator. For this purpose National Bank is addressing the following steps, including increase of the monetary politics rate from 5% to 7.5% and also, I think, those politics which mean strengthening of the rate of the GEL. These all together define the process of decreasing inflation.
However there is an issue which I think is quite important. The case is that in the long-term macroeconomic point of view the price of strengthening the GEL is higher than its effect on inflation. So I think that in the process of curbing inflation other means should be used more than this leverage. There are sterilization activities including deposit certificates, deposit auctions and others. Central Bank is using these leverages too and I believe, will be more active in this respect so that surplus money mass is removed from overall flow. Moreover, it is an important treasury liability topic, which I believe, is a good mean in managing liquidity.
There is also another issue. Fighting inflation should not only be by monetary means. Fiscal methods should also be used here. I think work in this direction should be more active. I can cite several examples. If the amount received from privatization covers external liabilities, current income will cover current expenses and will reduce the budget deficit, meaning the inflation processes will be curbed. Together with monetary means fiscal methods should be used and I think the effect would be more important for the Georgian population.
A complex approach is needed for fighting inflation and here, the Government, Ministry of Finance and National Bank should act in unison. As only the Central Bank, despite the fact that it effectively uses leverages, will have difficulty in fighting against inflation and reducing it alone.
Expensive Credits
The major challenge for the Georgian banking sector in 2009 was the slight increase of credit risks and the worsening of credit portfolio quality. The total volume of inactive credits increased slightly in 2009 and in the unstable economic environment banks sharply reduced credit activities.
I understand that we would like to reduce interest rates. However this cannot happen so quickly, considering the existing risks which remain in the credit system. One factor should be added to this – the high interest rate on deposits.
This coin has two sides. There are high interest rates on deposits. However, at the same time we should consider that existing inflation practically “eats” interest profitability. There is no quick reduction in the interest rate of USD denominated deposits, as people are aware that the purchasing power of 100 USD at the beginning of the year is more than of 110 USD at the end of the year, which is together with dividends. To synchronize these processes, requires time and making economy more active. At present, in the banking system the dynamics of deposit increase exceed credit increase dynamics, we often face surplus liquidity, and one of the major problems is good, healthy credit projects deficit.
Larization
Larization is activities directed towards the de-Dolarization of the banking sector. At a time when we have more than 70% of deposits in foreign currencies and 76-77% of credits in foreign currencies nominated, there is one way to fight against it. This is forming real trust towards the GEL, which means sustainable development of the country’s economics and forecasting a national currency rate. This is a long term process, as the Dolarization of the Georgian economy is historical. If we look, we will find that approximately 70-75% of total deposits are in foreign currencies. However, if we take the deposits of individuals, this indicator would be even higher. Consequently it is necessary to avoid sharp fluctuation of the GEL rate. However, the current GEL strengthening process supports Larization.
We should remember the situation of November 2008, when the GEL against the USD suddenly decreased by 16%, from a 1.42 to 1.65, or the change of this year, when the rate increased from 1.78 to 1.89. This is negatively reflected in the consciousness of individuals and consequently the mission which means motivation of Larization, is quite serious and National Bank will have to do important work in this direction. In this regard, I believe the main precondition is avoidance of sharp changes in rate.
During 3-10 June of 2010, importers quickly responded to the devaluation of GEL towards the USD from a 1.78 indicator to 1.88 by increasing the prices of products. Despite the fact that since this occurred, over 3 months, the USD- GEL rate already strengthened to a 1.76, there was no decrease of prices in the country, on the contrary – prices even increased further. Many questions arise about the reason for why GEL devaluation is so quickly reflected in products becoming more expensive, and in the case of the GEL’s strengthening GEL prices do not decrease but actually increase?
When we speak of the strengthening of the GEL I believe the National Bank is behaving correctly, as it is trying to affect inflation processes and reduce it. These problems concerning prices are a result of the existing conditions in the Georgian economy. The Georgian economy has many other types of problems and one of them is the problem of healthy competition in the market.
It’s obvious that prices should be regulated by the market. However, often due to the fact of not having real, healthy competition we have a different picture. As it seems, the Georgian economy today needs a different vision and approach, for the wellbeing and purchasing power of the population to be better. However, these are issues of economic politics and need coordinated work to maximally increase real competition, effectively activate anti-monopoly legislation, so that every citizen of Georgia can feel the real outcome of the National Bank and Government’s teamwork.
About Irakli Kovzanadze:
Professor Irakli Kovzanadze has published four books and more than 50 articles in economics, including problems of the genesis, development and manifestation of systemic banking crises, their forecasting and prevention.
Being an MP he served as a Chairman of Finance and Budget Committee of the Parliament of Georgia (2004-2008) and as a Chairman of the Task Force of EBRD/ OECD on corporate governance of banks in Eurasia (2007-2009).
He has more than 20 years of experience of working as CEO in the banking system of Georgia, siting on the boards of the leading banks in post-Soviet countries and Europe and is one of the pioneers of the challenging reform process of financial sector of emerging countries.
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