The FINANCIAL — Recently optimism about the global economy has gained ground and a lot of people believe that we might be approaching the bottom of the recession. Certain indicators in the US and elsewhere point to that direction. However as David Amaglobeli, Vice-President of National Bank of Georgia (NBG), told The FINANCIAL, it is premature to be thinking that a recovery from the recession is close-at-hand.
Recently Moody’s Analytical Group notably downgraded the ratings of two leading Georgian banks. The reason as stated was due to losses caused by last August’s war and limitations projected by banks.
However Nick Piazza, Galt and Taggart Securities CEO, told The FINANCIAL that share prices of Bank of Georgia increased by 150% in April.
Amaglobeli says that as some businesses and individuals have suffered from the consequences of the war and most importantly from the global economic crisis, they experienced difficulties in servicing their debt obligations. Subsequently, banks had to undertake provisioning for future loan losses stemming from such troubled borrowers.
“There have not been any restrictions imposed on commercial banks by NBG or the FSA. It is impossible for our banking sector to return to pre-war growth rates in the immediate future as both local and global economies remain strained and in recession, limiting the ability of Georgian banks to borrow domestically or internationally,” he says.
The banks in Georgia have also significantly reduced the numbers of employees in their branches. NBG declares that these downsizings conducted by several Georgian banks will help alleviate their financial conditions and that they were not associated with any losses for the banks.
In its annual report, Doing Business 2009, the World Bank has ranked Georgia as the 15th most business-friendly state out of 181 countries surveyed.
Elsewhere in the Caucasus, Azerbaijan was ranked in 33rd place and Armenia came in 44th. The Russian Federation lagged far behind in 120th place. The Doing Business index tracked various red-tape hurdles to economic activity, including the time and cost of opening and running business in a given economy. The report does not measure other relevant factors, such as the quality of infrastructure, inflation and criminal activity.
Georgia’s Finance Ministry expressed hope that the World Bank’s assessment would boost foreign investor confidence that has diminished in the wake of the 2008 war with Russia, domestic political turmoil and the global financial crisis.
The figures of NBG show that the volumes of current accounts and term deposits are 2.3% higher than last year’s period. As of February 2009 the year on year growth rate of the total banking sector deposits was 1.1 percent. Growth rate of demand deposits was negative, while term deposits increased in the same period. Apparently there is a declining trend in deposit accumulation which is a global trend reflecting worsening confidence in the financial sector and deleveraging.
“We do not see any persistent trend in the composition of foreign currency denominated deposits in favour of the EUR. Although the share of EUR deposits increased by only a couple of percentage points in February of this year relative to the same period last year, it has been very volatile during said period without exhibiting any specific trend. Hence we cannot conclude that the population is developing a firm trust in the EUR.
A simple formula that we are proposing is that the public should keep its savings in the currency in which they anticipate to spend,” David Amaglobeli told The FINANCIAL.
The Vice-President of NBG denies that there’s formal work ongoing on the establishment of a deposit insurance system in Georgia. David Amaglobeli confirms that KfW was indeed involved in supporting the creation of a deposit insurance system in Georgia back in 2005. The National Bank of Georgia together with German consultants produced a draft law on the deposit insurance system at that time. KfW had committed certain financial support as an initial contribution for the deposit insurance fund. However back in 2006 the Government rejected the idea of introducing a deposit insurance system in Georgia and since then no progress has been made in this respect.
Georgia is the only country on the European continent not to have an explicit deposit insurance system. In general the deposit insurance system provides social protection for small depositors which represent an absolute majority of bank depositors.
“Deposit insurance enhances public confidence in the banking sector and increases banking stability. Deposit insurance encourages the mobilization of savings in the banking sector and thus supports economic growth. Therefore we think that the introduction of deposit insurance will have a positive impact on the domestic banking sector,” adds David Amaglobeli.
Experts in Georgia expected the GEL to devaluate further in 2009, but thus far it hasn’t happened.
NBG promised the public that there would not be any big swings in the exchange rate after the one-off devaluation in November of 2008, despite very dire predictions by various experts.
“NBG has recently reshuffled the operational framework for interventions in the foreign exchange market and introduced increased flexibility in the exchange rate policy. The managed float exchange rate policy does not allow for making projections about the level of the exchange rate,” notes David Amaglobeli.
From 2009 the taxes on income and revenues have been cut by the Government. Tax reform implemented in the beginning of this year was part of a broad fiscal stimulus plan of the Government’s. Amaglobeli states that the objective of this fiscal stimulus plan is to encourage economic activity and increase growth.
In December NBG made a statement blaming pharmaceutical companies for raising prices on medicines, which plays a key role in inflation.
In response Paata Kurtanidze, General Director of Aversi Pharmacy, one of the leading pharmaceutical companies in Georgia, said that the price changes were caused by inflation and for no other reason. “We can’t understand why NBG blamed pharmacists in influencing inflation,” he said.
According to NBG contribution of medicines in the overall headline inflation is dominant among all other components. As of March 2009 the inflation of medicines contributed 1 percentage point to the overall annual inflation of 1.6 percent.
Since the previous committee’s meeting, the outlook of economic development was more pessimistic. Foreseeing the world economical crisis and to control inflation NBG will soften monetary politics. It will continue observation of economical events and financial markets and will receive a corresponding decision.
“At present, we maintain the previous GDP projection of 2.5 percent for 2009,” claims the Vice-President of NBG.
Written By Levan Lomtadze
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