Q. How US-Georgia Free Trade Agreement will affect Georgian National currency or financial sector as whole?
A. A free trade agreement with the US, like any other agreements of this kind, may reasonably be expected to benefit the Georgian economy in a number of ways. Potential gains primarily include a boost to exports of goods as well as an impulse for greater foreign direct investments into the economy. The former will help narrow a current account deficit while the latter may give rise to solid foreign currency inflows as well as import of know-how. Other things being equal, all these are expected to result in a medium-run appreciation dynamics in effective exchange rate of lari. The financial sector would also benefit from subsequent improvements in the external balance – through lower risk premia, stronger resilience, and greater stability – especially for a financially dollarized country like Georgia.
Q. US and EU are imposing sanctions on Russia that continues escalation of situation in Ukraine. As we know Russia will be cut of USD and other western money resources. How this will affect Georgia’s financial sector or businesses?
A. Ukraine and Russia are Georgia’s main trading partner countries. Geopolitical tension can be reflected on the Georgian economy through both direct and indirect channels. Geopolitical turmoil will significantly worsen economic outlooks in both countries. While Ukraine will suffer from immediate consequences of the military conflict, Russian economic growth prospects would drastically deteriorate as a result of sanctions. Deteriorated economic growth in both countries will dampen their demand and we will face some fall in exports of goods and tourism as well as in remittances from those countries. Meanwhile, geopolitical tensions make the region riskier for investors. Hence, it would increase sovereign risk premia, resulting in weaker capital flows in the region and elevated depreciation pressures on domestic currencies that may ultimately translate into inflationary pressures. While this is a yet another unfavorable development for the Georgian economy, for the last 6-7 years thanks to consistent macro management framework our macroeconomy has shown resilience to several pronounced external shocks. This is what international financial institutions as well as rating agencies have repeatedly emphasized.
Q. Russia is the number one in terms of money transfers to Georgia, thanks to the huge number of Georgian job immigrants there, or Georgians living in Russia. Please evaluate how Sanctions will be affecting money transfers?
A. Over the last couple of years, dependency on money transfers from Russia has been falling and was significantly reduced as remittances have become more diversified. Currently, the share stands at only around 17% (17.5% in 2021), while 8-10 years ago the figure was more than 50%. It is also worth noting that in case of effective restrictions on electronic transfers some part of inflows from Russia might be substituted by transporting cash individually across the border.
Q. Does NBG considers joining western countries in the series of sanctions? or are you going to cut money turnover with Russian banks?
A. The National Bank of Georgia has always operated and continues to operate in full compliance with the standards set by international resolutions. The United States, Great Britain, EU and other countries have imposed sanctions on Russian financial system due to Russia’s aggressive military activities in Ukraine. The National Bank of Georgia instructed the representatives of the Georgian financial sector to comply with the requirements of these sanctions.
Q. What are you expectation about GEL depreciation?
A. Georgia is a small open economy with a floating exchange rate regime meaning that exchange rate may freely fluctuate due to changing market conditions. Thus, in the short run, it is virtually impossible to pin down dynamics in the exchange rate or to forecast its short-run trajectory. Even in the longer run, over which an exchange rate is believed to be mostly influenced by macroeconomic fundamentals, current high degree of uncertainty makes it extremely difficult to make predictions. While, on one hand, end of the pandemic and subsequent recovery in tourism is supposed to improve current account balance and ease pressures on the exchange rate, on the other hand, current geopolitical turmoil creates substantial risks in the opposite direction.
Q. Recently NBG approved new code of ethics regulating communication with borrowers and keeping personal information. Please explain what are the new requirements and why they were necessary.
A. Protecting the rights of consumers in the financial sector is one of the important tasks of the National Bank of Georgia. Hence, the NBG strives to improve current practices to align them with international best practices and address underlying challenges.
The National Bank has approved a Code of Ethics for debt collection by financial institutions which is based on the requirements applied in developed economies and international best practice, reflecting the peculiarities of the local financial sector and the important issues raised by consumers. The enactment of the code will help strengthen the reputation of financial institutions as trusted partners in the eyes of consumers, and protect consumer rights and interests in the best way practicable, while ensuring that financial institutions conduct business relationships based on the principles of good faith, transparency and fairness.
The Code introduces the obligations of the financial institutions vis-à-vis the customers in the process of collecting debt, which includes but are not limited to the following important issues:
- Obligation to provide correct information to the customer, adhere to ethical and moral norms, and communicate in a business and polite manner. In dealing with customers and contact persons, the financial institutions should not provide misleading and/or incorrect information to them. The information that is delivered, undelivered, inaccurately and/or incompletely provided to the customer should not motivate them to make a decision that they would not have made if they had accurate and complete information.
- The Code establishes a procedure for contacting customers and contact persons. It includes the form of communication, time and a list of information to be provided and/or sought. Contacting a contact person will only be possible in the cases provided for in the current/active contract, while contacting related third parties will only be possible to determine the location of the borrower. It is not permitted to share information on customer liability with a third party. The concerned persons can be contacted only in the period from 09:00 AM to 20:00 PM. In addition, the contact person is entitled to request the financial institution to terminate communication with them.
- The financial institutions now have an obligation to maintain records of communication with customers and contact persons and to keep them for a period of two months.
- Disposal of the loan portfolio, with some exceptions, will be allowed only to entities under the supervision of the National Bank of Georgia. However, if the loan portfolio is managed by another entity, the entity subject to the supervision of the National Bank of Georgia will be responsible for the compliance with the requirements of the Code, etc.
The new requirements are meant to improve the quality of consumer protection in the financial sector. The National Bank will continue to monitor market practices and upgrade the applicable regulatory framework as necessary.
Q. As you know interest rates of mortgage loans in GEL at Georgian banks increased significantly. While rates for USD loans remain low. Do you think that NBG regulations are limiting individual borrowers seeking USD loans and giving advantages to companies that can get larger loans in USD.
A. When comparing GEL mortgages to foreign currency alternatives, interest rate differential is not the only factor for consideration. Taking USD credit makes the borrower whose income is in Georgian lari exposed to the currency risk, which is significant, given the exchange rate volatility that we or the countries in the region experience. Moreover, the major part of FX mortgage loans are floating interest rate loans, further exposing the clients to the interest rate risk. This is especially noteworthy considering historically low levels of US dollar and Euro interest rates and their potential rise during upcoming periods. On the other hand, to address elevated inflationary pressures, NBG has already tightened monetary policy and the current rate stands at highest level for the decade.
It is worth mentioning that most of the borrowers have income in GEL and fully unhedged to currency fluctuations. To mitigate the risk, NBG’s responsible lending regulation requires stronger borrower level buffers when taking FX credit. In addition, to protect the most vulnerable, Civil Code mandates lender to issue less than 200,000 GEL equivalent loans in local currency only. The companies which borrower larger amounts have a flexibility in currency choice but at the same time they are more capable to manage risks or use hedging instruments.
Q. What is the estimated turnover of crypto currency in Georgia?
A. Due to the fact that the VASP sector is not regulated at this stage, we do not have accurate data on this issue. However, the fifth Round Mutual Evaluation Report of Georgia which was published in September 2020 by Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – MONEYVAL states that the exchange transaction volume can be between GEL 3.5 to 5 million (EUR 1 to 1.5 million) per month.
Q. Does NBG plan to regulate crypto market in Georgia?
A. Yes, the NBG is planning to regulate crypto market in Georgia. To this regard we have developed an initial draft of the relevant legislative changes in accordance with Financial Action Task Force requirements. We are also benefitting from technical assistance of the International Monetary Fund staff in the development of this regulatory framework. Draft of Legislative changes at this stage includes registration / licensing, compliance testing and AML control requirements for crypto market players.
It should be noted, however, that before aforementioned regulations enters into force, some measures have already been taken by the NBG. In particular, financial institutions have been banned from providing virtual asset exchange and transfer services. Also, persons that carry out activities related to virtual assets should be classified by financial institutions as high risk clients and should be subject to appropriate enhanced preventive measures.
Q.Currently there is only one Russian bank operating in Georgia. Are you going to revoke the license in a lights of sanctions?
A. We are legally restricted to share any supervisory information that NBG plans to undertake with regard to a specific bank. But we can say that one of the main tasks of the National Bank of Georgia is to ensure the stability of financial sector. Protecting the interests of financial sector depositors is one of the main priorities under this mandate. Our task is to guarantee the safety of each depositor’s funds in the Georgian financial system. The interests of all depositors will be protected and the liabilities will be fully satisfied.