The FINANCIAL — “In August the total amount of physical and corporate client deposits decreased by USD 338 million compared with the previous month,” David Amaglobeli, President of the National Bank of Georgia, told The FINANCIAL. He said “We should soon see prices coming down. At the end of the year inflation will be around 8%.”
The Russian-Georgian war had an impact first of all on the banking sector. There was a significant outflow of deposits.
According to preliminary figures, compared with August in September deposits increased by more than USD 106.6 million. The National Bank of Georgia (NBG) forecasts that the amount of deposits and loans will return and exceed before-war figures by the end of the year.
“Despite the conflict and vagueness on international markets, we still think that as the situation stabilizes investors’ interest in the Georgian banking sector will rise,” David Amaglobeli, President of NBG, told The FINANCIAL.
“While the banks’ loan books have shrunk we think that in a month there will be full scale lending to the customers,” commented David Amaglobeli.
“According to NBG, the Georgian banking sector is stable and fast developing. Therefore, it is very attractive to investors,” said Amaglobeli.
Georgia currently has 16 countries-bilateral creditors. The key lenders to Georgia are: Austria (USD 1.76mn), Azerbaijan (USD 14.43mn), Turkmenistan (USD 1.61mn), Turkey (USD 44.7mn), Iran (USD 11.32mn), Russia (USD 119.99mn), the USA (USD 39.84mn), Armenia (USD 17.42mn), Uzbekistan (USD 378,000), Ukraine (USD 345,000), Kazakhstan (USD 27.77mn), China (USD 4.39mn), Germany (USD 181.39mn), Japan (USD 49.08mn), Kuwait (USD 14.04mn) and the Netherlands (USD 9.3mn).
“Presumably, the war won’t have a great impact on express money transfers. During the embargo period there were attempts from the Russian side to block money transfers by juridical means. Despite this fact, the rate of transfers soon stabilized. This dynamic will be present in this case too,” noted David Amaglobeli.
According to the information provided by NBG Russia is the leading country in money transfers into Georgia.
“Georgia will not attempt to re-nationalize assets owned by Russian companies such as UES, Vimpelcom or VTB following its conflict with Russia,” the Georgian Deputy Prime Minister Giorgi Baramidze told mergermarket, according to the Financial Times.
“VTB Bank conducted important reforms last year to improve financial status and management. It is noteworthy that in August VTB increased its capital. I think that the bank will continue normal operations and develop its services in Georgia,” the President of NBG told The FINANCIAL.
Investment banks are more risky than other banking sectors. The main reason for this is that commercial banks are far more regulated. In general there is a vague situation on the foreign financial markets and investors are looking for less risky assets.
“At this moment making any forecasts about investment banks would be very difficult for us, but the fact is that investment banks will have to face many difficulties in the near future,” said David Amaglobeli.
In the spring of this year significant changes were made in the law of National Bank of Georgia. As the NBG representative said these changes strengthened independence and enabled the bank to implement its monetary policy more effectively.
“The level of independence of NBG in Georgia is much higher than in the CIS (Commonwealth of Independent States) and other countries. It is not as high as in many independent countries and there is still work to do,” David Amaglobeli, President of the National Bank of Georgia, told The FINANCIAL.
“Lately our level of independence has increased not only on paper but factually. If it had just been outlined on paper, then NBG wouldn’t have been able to stabilize the financial situation in August. We were able to change monetary instrument, decrease reserve demands and provide liquid asset supplies to the banks.”
NBG is supplying short term liquidity to the banks. Plus it has introduced refinancing operations.
”We will stick to the new policy for the next 12-18 months until there’s a reversal in the liquidity situation in banks, so that there are excess reserves pulling the pressure off prices,” David Amaglobeli told The FINANCIAL. “We have also lowered policy rates. A policy rate which was about 12% on one week requirements in operations was changed to 10%.”
In July inflation was in the high single digits 8 and 9. NBG said that the increase in inflation was due to the war. As there were supply bottlenecks market prices have increased. Producers couldn’t get their products to the market because there were no transport links. According to the President of NGB we should soon see prices coming down, so at the end of the year the inflation will be around 8%. The bank will most likely target inflation around 8% in 2009.
There was only one week of formal restriction on bank lending which was from August 11 to 18.Since than there has been no formal restriction on bank lending. Commercial banks have decided to be more cautious in issuing new loans because of changing circumstances. The perception of the risks has changed and banks have to adjust to new realities because of shortages. For this reason NBG has introduced a special liquidity facility to inject additional money into the system.
Georgia owes USD 1.32bn to international financial institutions and organizations. The main creditors are the International Monetary Fund – USD 235.93mn (with the National Bank of Georgia being the main beneficiary of these funds used mainly for beefing up the country’s foreign currency reserves); the World Bank – USD 955.1mn; the International Fund of Agricultural Development – USD 13.06mn and the European Union – USD 89.72mn. The European Bank for Reconstruction and Development (EBRD) is also among Georgia’s largest creditors with state guaranteed loans to the amount of USD 4.45mn.
According to the US government aid agency, Georgia requested between USD 1bn and USD 2bn in international aid to repair and develop its infrastructure after last month’s conflict.
The foreign currency aid that will be granted from the U.S., EU and international financial institutions like the World Bank and the Asian Development Bank will become part of the government revenues and will be used as part of the expenditure envelope.
“If we see that the government is injecting too much money into the economy then we will have to sterilize an additional injection. NBG will do it through a fiscal or monetary policy. Now we are not at the point where we can judge whether or not it will create additional pressure as we don’t know what the scale of this assistance will be,” said the President of NBG.
At this moment there is only one commitment which is from the U.S. government. USD 250 million will be transferred in support of the budget by the end of the year. There have been pledges by other countries and also the U.S. for the remaining USD 750 million. The full commitments will be announced at the end of October at the international donor companies meeting in Brussels.
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Deficit of the current account of the balance of payments for the 2nd quarter of 2008 comprised USD 899.0 million, which is 2.2 times higher than the indicator for the same period of the year of 2006 and 14.4 percent more than the data for the previous quarter.
Trading with goods was the most capacitance deficit component in the current account and its balance equalled USD 965.8 million. This was caused by the high rate of growth of import. In particular, in the 2nd quarter of 2008 the volume of import has increased by 54.7 percent as compared to the same period of last year and exceeded the indicator for the 1st quarter by 20.5 percent, while the rates of growth of export in the same period have been 38.9 percent and 42.7 percent respectively. In the first half of the current year, the main importable goods were oil products and vehicles, the total amount of which has made 30 percent of import as a whole. During the first six months of 2008, the import of oil products and vehicles has grown nearly 2 and 2.2 times correspondingly.
The balance of service is positive and equals USD 23.9 million for the 2nd quarter of 2008. From this amount the export of service is USD 360.3 million (it has increased by 29.9 and 35.4 percent as compared to the last quarter and same period of 2007 respectively) and the import of service – USD 336.4 million (this growth amounted to 30.6% and 62.9% respectively). From service trading, the positive balance is characteristic to travel (USD 136.0 million. It increased by 55.3 percent as compared to the 2nd quarter of 2007 and 1.9 times as compared to the 1st quarter of the current year), communication (USD 3.6 million) and government service sectors (USD 10.8 million. It declined by 13.7 percent as compared to the same quarter of the previous year and by 23.0 percent as compared to the last quarter). With regards to insurance, other business service, construction and transportation sectors, balance is negative (-37.5, -14.2, -5.6 and -4.7 million USD respectively).
The balance of income is negative and equalled USD -127.2 million in the 2nd quarter of 2008. Income credit, the main part (83.7 percent) of which is the reimbursement of employees, reached USD 100.8 million that is by 8.7 percent higher than the same indicator of 2007 and by 4.7 percent more than the figure for the last quarter. Debit of income is USD 249.5 million, which is 1.5 times higher than the indicator for the same period of 2007 and is 1.3 times more than the data for the 1st quarter of 2008. The investment income constitutes 90.9% of the income debit.
Volume of current transfers is quite solid and together with the balance of service it reduces the deficit of the current account caused by the balances of goods and income. The balance of current transfers constituted USD 170.0 million in the 2nd quarter of 2008, from which the inflow is USD 189.5 million and the outflow – USD 19.5 million. During the 2nd quarter of 2008, the current transfers of the government sector declined by USD 10 million as compared to the last quarter of the current year and reached USD 19.2 million. With regards to transfers of the private sector, it increased by 5.6 percent as compared to the 1st quarter and equalled USD 170.4 million.
Capital transfers for the 2nd quarter of 2008 make up USD 17.9 million and have increased by 3.8 percent as compared to the last quarter. But if we compare them to the same period of the year 2007, they have decreased by 34.1 percent.
Direct investments increased by 42.5 percent in the 2nd quarter of 2008 as compared to the same period of 2007 and comprised USD 522.2 million, while according to the quarterly data, a 23.7 percent increase of direct investments was reported in the current quarter as compared to the last quarter. The growth of investments is mostly conditioned not only by the privatization process (USD 202.0 million) and by investing in banking and entrepreneur sectors (investment in the equity capital constituted USD 376.0 million), but also by the significant raising of current reinvestments. The amount of reinvestment has reached USD 116.4 million which is 1.5 and 13.1 times higher than the aforementioned indicator for the last quarter and the same period of 2007 respectively. Inflow of investments in the form of other capital or other types of loans was USD 29.9 million and has declined as compared to the last quarter as well as compared to the analogous period of 2007 (53.4 percent and 6.1 times relatively).
During the 2nd quarter of 2008 the number of portfolio investments is modest as compared to the previous quarter and in forms of equity comprises USD 13.0 million. Eurobonds, which have been issued by the government and are a part of portfolio investments, have enabled to mobilize USD 500 million. In that way, the total amount of portfolio investments have sharply increased and net balance reached USD 473.9 million; USD 46.7 million of which was the growth of assets and USD 520.6 million – the growth of liabilities.
The balance of other investments equalled USD 18.3 million in the reporting period and is reduced as compared to the previous quarter as well as compared to the same period of the last year. But, the assets have steeply increased (growth has comprised USD 414.6 million) so too have the liabilities (USD 432.9 million). The share of currency and deposits from assets is 92.5 percent (USD 383.6 million), 82.9 percent of which comes from government and 15.3 percent from the banking sector. 70.6 percent of liabilities are loans. During the reporting period, loans of commercial banks and the government sector have increased by USD 313.8 and 27.1 million respectively. At the same time, the loans of other sectors have declined by USD 33.7 million.
During the 2nd quarter of 2008 transaction related changes reached USD 112.8 million. The total foreign currency reserves rose by USD 114.5 million and equalled USD 1,526.1 million, while the SDR account has declined by USD 1.7 million.
“We saw our role in maintaining stability in the exchange market in August and September which we have successfully managed. We don’t subscribe to the point of view that this nominal appreciation of less than half percentage point will harm exports,” pointed out Mr. Amaglobeli.
Written By Levan Lomtadze
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