The FINANCIAL — National Bank of Georgia’s (NBG) statement, about unprecedented international reserves, in amount of 1,460 million USD, does not calm experts’ expectations about stability of GEL. Independent expert predict GEL record decline in summer. As for NBG “unexpected negative information for Georgia’s economy may cause depreciation, and positive information will cause appreciation.”
“My expectation about GEL is its high decline against USD.1 USD might reach 2 GEL in around six months”, Vakhtang Babunashvili, Associated Professor of Financial Accounting, Caucasus University (CU), told the FINANCIAL.
According to National Bank of Georgia for December 2008, the volume of official international reserves exceeded 1,460 billion USD, an increase of 7% from 2007's level.
Foreign currency reserves
Current Data: in Millions of US Dollars
Georgia – 1,460
Latvia – 4,244.48
Lithuania – 5,384.60
Armenia – 1,485.51
Germany – 39,460.06
Venezuela's – 42.200
Like Babunashvili, Temur Kuprava and Akaki Tavadze, lectures at European School of Management Tbilisi, foresee the GEL’s soft decline against USD.
“NBG has enough amounts of reserves, over a billion, which will be enough to keep the stability of the national currency. The problem lies in spending reserves correctly. Russia started spending their reserves to keep the national currency even though the whole world advised them to stop,” Akaki Tavadze, Tbilisi Free University, ESM Tbilisi, Management Programme lecturer, declared.
Temur Kuprava, Master of Economic and Finance Programmes at Free Tbilisi University, ESM Tbilisi also believes that NBG has enough reserves to keep stability of the national currency exchange till summer. “But in keeping stability of the national currency NBG has spent about USD 3 million and if this process continues it will end up in the billions.”
“Georgia received a huge amount of financial aid and this resource will soon compensate demand and supply. But till we finally get it in summer NBG will need to spend more of its resources, which they will manage. We should not expect other changes,” says Kuprava.
“In Georgia we have a floating Exchange Rate (EX) that means that EX cannot be forecasted in the short term. In the long run we do not expect any large changes in the Nominal Effective Exchange rate, as for the USD or EUR, the GEL EX will depend on the developments on the world exchange market,” says Archil Mestvirishvili, Director of Macro Economical and Statistic department of NBG.
“New, unexpected negative information for Georgia’s economy may cause depreciation, and positive information will cause appreciation,” Mestvirishvili noted.
“There is still a sense of panic amongst our citizens and people are buying USD as soon as they receive their salary. Of course, they face the problem of losing money in the exchange but the USD ensures them safety in the long term. We can’t say what will happen in spring, as the crisis is due to fully hit Georgia in the spring,” Tavadze, ESM Tbilisi, declared.
Kuprava can’t find anything unsubstantial, “We heard a lot in the address of NBG at the end of November but it was not unsubstantiated. NBG had very feeble arguments”.
“A big problem is that Georgia is not a stable country. It’s a sad reality and we can’t blame anyone for it. If we discuss the subject of demand and supply, the supply of GEL is higher than demand so if it won’t stop, we can presume to get the same results as we had in November. Not to repeat our own mistakes, our country must start producing more of its own products,” Tavadze, ESM, says.
“The subject of the trust of our citizens in regards to the national currency is most important in keeping the stability of our economy overall. The situation won’t change until people stop depending on foreign currency,” Kuprava added.
“The decline of the exchange rate will have negative effects on the Georgian economy due to several factors. First of all most of the goods imported from abroad are denominated in USD and the appreciation of this currency against GEL will trigger inflation driving the purchasing power of the Georgian consumer down,” Babunashvili says.
“Fluctuation in the exchange rates will have a negative effect on the banking sector too, which is one of the driving sectors of the local GDP. The underlying reason is the USD denominated corporate and retail loans – especially Mortgage Loans. This type of loan is highly averaged by its nature as the consumer has to give up a large portion of his monthly income, and in the current situation the payments to the bank will increase if the consumer has a loan denominated in USD. From the other side the consumer will be pressed from inflated prices leaving little or no room for savings. This kind of scenario will drive up the level of overdue and bad debts for banks,” Babunashvili, CU, explained.
As for Kuprava, “Georgia will face instability of the GEL against foreign currency till the difference of import and export is changed. Until the diversity is regulated by financial sources received from foreign countries”.
Like Kuprava, Babunashvili presumes international financial aid to be the main source for stabilization of national currency, “In the short term the main source of the stability will be the financial aid to be received from the West. However in the long run the classical approach is to stimulate the real sector of the economy (manufacturing, agriculture) and attract large scale FDIs.
After sharp currency exchanges in November David Amaglobeli, executor of NBG’s President’s responsibility, commented that the GEL was not depreciated. It had just declined in comparison with the USD but strengthened against the Bulgarian Lev, Icelandic Krona and so on.
If we take into account the last three months, the GEL exchange rate depreciated only with respect to the US dollar, while it appreciated against the majority of other foreign currencies.
As a result, the GEL nominal effective exchange rate, which is a weighted exchange rate with respect to the currencies of Georgia’s trade partner countries, has in fact appreciated.
In particular, during the last three months the GEL appreciated by 6.5% against the Bulgarian Lev, by 4.5% against the EUR, by 12% against the GBP, by 31% against the Icelandic Krona, by 10.5% against the Romanian Lei, by 18.5% against the Hungarian Forint, by 11% against the Czech Krona, by 19% against the Australian Dollar, by 14.4% against the Turkish Lira, by 7% against the Estonian Krona, by 7.5% against the Lithuanian Lit, by 7.2% against the Latvian Lat, by 6% against the Ukrainian Hryvna, etc.
“The importance of the strengthening in value of GEL against any other currency depends mainly on the import-export relationship with that foreign country. At this moment we are importing most goods from Turkey, East Europe and other countries and appreciation of the FX rate will put us in a better position. However it will have a very bad effect on our exporting sector, especially the Agriculture sector,” Babunashvili, CU, commented.
“That’s absurd. USD remains a key currency around the world”, Kuprava, ESM comments NBG statement.
“Even the Chinese are keeping their reserves in USD in spite of their ambitions to make the Yuan the world liquid currency. So, we can’t be proud of having reserves of Hryvnia, Krona or even Lei,” Kuprava, ESM says.
“This is called speculation. If we look at the Ukrainian Hryvna today, of course the GEL is higher but the question is what it gives to our economy. The question is what kind of results devaluation will have. Have the prices of products imported from Ukraine decreased? The President of NBG stated that the most important thing for customers is keeping the same prices of products imported from Ukraine,” Tavadze, ESM Tbilisi, says.
Which currency to keep deposits in:
“Deposits must be opened in USD. The best way to invest money is to buy valuable things, gold and real estate. But in the case of the latter, they must wait for a while till prices stop slowing down,” Tavadze noted.
“I can’t advice anyone on which currency to keep deposits in, but as for me, I would keep them in USD,” Kuprava says.
“Actually there is never a big difference in exchanging in to USD and EUR, so people can make the decision on which one of these two currencies to choose,” Babunashvili, CU, says.
“In order to reduce exchange rate volatility risks (for those who have such a desire), we should try to plan revenues and expenditures in the same currency. In particular, if a family has their main revenues in GEL, they should get a loan in GEL as well, and so on. We advise the population to avoid speculative transactions. For example, the EUR is more volatile than the GEL against the USD but the population in Europe does not convert its savings from one currency into another because of this volatility,” David Amaglobeli, NBG President suggests in FAQ on NBG official website.
“Also, deposits should be kept in that currency which is intended to be used for expenditures in the future. If a deposit does not have a concrete goal, then it is advisable to have a diversification of deposits, i.e. placement of deposits in different currencies,” Amaglobeli added.
Written By Madona Gasanova
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