The FINANCIAL -- Georgian commercial banks will face a reduction of profit due to squeezed economic activity in the country. Interest rates on loans are expected to increase and deposit rates to slump in 2015. With a record high negative trade balance, starting local production remains the key issue for the country in a short as well as long term perspective. In addition, further development of the country remains dependent on external factors, mostly the crisis in Ukraine.
“The profit of the banking sector will be reduced in 2015. They will not manage to reach the same level as they did in 2014. From a macro perspective, economic growth of the country will be reduced from 5 to 2%. So, the banking sector will not stand separately from this aspect. The slowdown of the economy squeezes any business. It is a natural process. Banks and crediting always follow business dynamics. The increase of business activity results in a growth of lending and its decrease results in a reduction. In general, long-term loans grow during a crisis. This happens at the expense of the refinancing of short-term loans. The loan portfolio’s growth will be much less in 2015 than last year. Therefore, the earnings of the sector will be reduced,” Giorgi Tsutskiridze, Executive Director at the Association of Banks of Georgia (ABG), told The FINANCIAL.
According to Tsutskiridze, further increase of the refinancing rate will result in the growth of interest rates on loans. “When economic activity is reduced, the rate on deposits falls. The rate on deposits increases when banks are under open competition. They try to attract more and more resources for issuing loans,” he said.
The negative trade balance of Georgia is 54%. While 20-25% is considered to be the norm. “This means that the pressure on a foreign currency is constantly high. Georgians fail to satisfy its basic requirements. This is what should be solved,” Tsutskiridze said.
“Currently, the existing negative trade balance is a result of our wrong economic policy of the last decade. Local production has been decreasing from year to year. Finally, we have become totally dependent on import. Georgia is a country that imports every type of product. It is not normal. Perhaps the GDP has been previously growing from year to year, but in a general economic context it was not effective. We cannot name any successful country which has such a high rate of negative trade balance. The success of any country nowadays is laid on production. This is a measure of a country’s economic success. Production brings additional value, creates jobs and increases consumer demand. Absence of local production is a result of the high level of unemployment in Georgia. The official statistics are coloured. Reality is even harder,” he explained.
Q. Dollarization has always been a big problem for Georgia. Since the recent devaluation of the national currency, do you expect this process to worsen?
A. The de-dollarization policy of NBG over the years has brought its results. In past years, about 7-8 years ago, the dollarization rate was 83%. Last year the figure was reduced to 68%. Stopping the dollarization process in such a weak economy as Georgia’s, is impossible. The only thing we can do, is lower the ceiling. The recent events have shaken the existing trust towards the national currency. Accordingly I am expecting the dollarization rate to rise even more. During fluctuations confidence in more stable assets grows. The sad reality is that the dollar is more of a stable asset. This demonstrates the weakness of our economy.
Q. Do you think that in the event of having a different economic policy Georgia would avoid external shocks more easily?
A. The steps and directions taken by the Government are absolutely right. There were some wrong steps, concerning regulations. They have been reflected in the tourism sector and investment climate. There was a miscalculation.
Regulations exist in even the most liberal of countries. Even in terms of land purchase. A conservative approach exists in every country. However, the main thing is that when you are having liberal rules you should not close the doors immediately. Implementing visa regulation is one of the EU’s demands. It protects countries from the entrance of illegal migrants from third countries. However, while implementing it, considering our reality was necessary. Georgia is an open country. So, the message that we delivered to foreigners was that the country had started closing its doors to foreign tourists and investors. It was a big macro risk of the country.
Officials should have issued information that they were planning such regulations. Accordingly, the results would not have been so dramatic. In this case investors would have had time to decide whether to leave the country or continue their operations. A change in legislation should not have the quality of surprise.
Q. Since the devaluation of the Georgian Lari we have been hearing accusations from the representatives of the monetary and fiscal policy made against one another. Which body has made the largest share of mistakes in this process?
A. The economic success of the country does not lie on either the central bank or any individual governmental body. Economic policy is one whole. So, accusing one side of this whole is incorrect. Each has their share of the fault.
The open intervention of NBG in currency change processes is the toughest monetary instrument. Any developed country applies this method only in extreme circumstances. In general more soft instruments are implemented, like an increase of the refinancing rate and repo rate. Although, due to the lack of development of the stock market in Georgia, the repo rate decrease was insignificant. Spending reserves during global shocks is unjustified. We might spend all the reserves like many countries have, and receive no result. We are facing a shock not lasting a day or a week. The final result would be empty reserves and no solution to the problems. NBG made some interventions but the volume was absorbed by importers in a few days. So, I absolutely welcome the decision of no intervention. Our goal should be minimization of the impact of global shocks, not avoiding them.
Q. NBG has recommended that commercial banks restructure loans for borrowers. The prolongation of loans with an additional interest rate has been the only step made by them. How loyal were the banks to their customers, which are facing over 30% of an increase in debt responsibilities?
A. There are four approved methods of restructuring that commercial banks apply during the deterioration of economic conditions. They concern individual as well as corporate loans. In general, banks offer prolongation of terms for individuals. The corporate segment can use the revision of the payment schedule. The third method is revision of interest rates to change fixing rate in variable. The fourth method is converting a loan from a foreign currency into the national one. So, the approach of Georgian commercial banks is well-approved and I consider it to be a step of solidarity.
Q. We have heard a lot of criticism of consumers - that they fail to manage risks while borrowing in a foreign currency. Meanwhile, we all know that the banks themselves deny the option of lending in the national currency. What are your thoughts on this?
A. Commercial banks have no access to long-term resources denominated in the national currency. The current accounts of citizens are mostly denominated in the national currency while termed deposits are in foreign ones. So, banks find it risky to issue long-term loans in the national currency. They secure their risks by preferring to lend in a foreign currency.
Q. What is you evaluation of the development of the Georgian economy?
A. Georgia is part of a global policy. This is unavoidable. There are some signs of the global policy developing in a negative way, but in the event of these being resolved, the situation will develop in a good way.
We are witnessing attempts to restore fundamentalism. On the other hand, there is Russia with its great-power hysteria. Hopefully Russia will come out of this hysteria. Restoration of relations between the U.S. and Iran is quite positive. This is a big leverage that the West can use against fundamentalism. Stabilization of U.S.-Iran relations will result in benefits for Georgia. The oil resources of Iran will enable a new economic trend to be reached. It will further reduce oil prices and decrease the product cost. Currently, energy cost makes up a large amount of total product cost. In this context Georgia has a chance to better overcome the current slowdown and move to a new stage of development. Lifting sanctions from Iran will bring great benefits to Georgia. Iran is our neighbour in the region. So, the volume of investments will increase significantly. Our main task is to avoid political cataclysms. Resumption of armed conflict in Ukraine will be the worst global cataclysm. It will lead to further sanctions over Russia. Accordingly we will get more of a reduction in remittances to Georgia. A negative impact on the investment environment will also follow.
If we exclude this possible negative scenario we will have quite positive results. Over a USD billion will be attracted for energy projects alone. There are also other projects that will attract an additional volume of investments. All of this will correct the currency imbalance. The deficit of USD, which causes the fluctuation, will stabilize. Investments are a direct factor in economic growth. So, in the event of this positive scenario Georgia will manage to have 8-10% growth next year.