The last week recorded a new wave of currency fluctuation. It is interesting how the Georgian sector responds to the existing realities and how steady the Georgian bank system is.
Giorgi Tkhelidze, a TBC Bank deputy director general in risks management field, overviews the current developments.
– Mr. Giorgi, how would you characterize the relevant currency crisis in Georgia? What factors do you consider to have inspired the currency volatility?
– We remember the currency fluctuations started in November 2014. The dynamics shows the GEL rate was quite strong last year, including in the month of October, while the currency rate volatility in our neighboring and trade partner countries emerged in August 2014. Their currencies depreciated, while our national currency showed steadiness in relation to both USD and the currencies of the mentioned countries. Nevertheless, the process was accompanied by a number of negative aspects. Our exports became less competitive. In November, the USD rate started extremely strengthening; on the other hand, regional currencies became more vulnerable and this factor affected the GEL exchange rate too. As to the outer and domestic factors, the main challenge is related to the deficit of current account. The budget spending is also very important and it was traditionally intensified in the last months of the year. In the fourth quarter of 2014 the currency account deficit worsened and this aspect badly affected the GEL rate. This process was the first reason for the GEL rate devaluation. Besides the budget spending, we should also take into account the negative dynamics in the tourism sector and in a growth pace of tourists inflows. This negative factor, to a certain extent, was related to bureaucratic approaches towards the entrance visa issuance. There is also a balance of exports and imports. Georgia’s exports, especially to the neighboring countries, had already shrunk before November 2014. As a result, the currency account misbalance affected the national currency rate. The fact is the USD exchange rate, in general, strengthened in the region and the Georgian national currency could not be an exception. On the contrary, the GEL devaluation pace was much lower compared to other national currencies in the Region. Regretfully, several additional outer negative circumstances arose in July 2015. Namely, the USD rate further strengthened, the Greek crisis sensibly restricted foreign currency transfers to Georgia. However, the outer factors have played unimportant role in the recent devaluation process. I think the last depreciation was enflamed by negative expectations in relation to the GEL exchange rate.
– Amid a plunge of global stock exchanges and national currencies, including in our neighboring countries and in Georgia, what would be your prognosis for the near future?
– In this case we should also analyze main external and internal factors in relation to the dynamics in the next months. The global dynamics shows the situation has deteriorated and negative macro trends of big developing countries like China and Russia are one of the important factors in this respect, along with expectations the US Federal Reserve System will increase the interest rate in September. We should analyze the current realities in the close neighbor countries, with which we keep tight trade and economic-political ties. Regretfully, negative trends are discerned in Kazakhstan, Azerbaijan, Armenia, Turkmenistan. In this situation we should maintain healthy dynamics in exports and imports to prevent a negative impact on the current account deficit.
The budget spending is also of vital importance. Budget expenditures should be managed skillfully and the expenditures part of the state budget must be equally distributed to the end. The current expenditures should be also sensibly cut and the government should make a focus on creating new job places and developing new infrastructures. Foreign investment inflows and foreign currency inflows will be also very important – higher injections will sensibly strengthen the Georgian national currency.
– It is interesting to compare the Georgian bank sector to other bank sectors in the region. What are the differences in terms of regulations, structures and stability?
– I have supervised the Georgian bank system from the United Kingdom for 5 years, when I was focused on the East European financial sector of the Barclays investments bank. The Georgian bank system was a leader in many aspects. I would name many positive parameters: Georgia is a country of growing dynamics like all other developing countries. The bank sector is quickly growing. We can assert the Georgian bank sector is positively developed for many years: it is regulated conservatively; it is stable and very transparent. As opposed to the neighboring countries, the indicator of bad loans is very low and this indicator is often lower several times compared to Romania, Hungary, Azerbaijan, Ukraine. Georgia’s bank portfolio could be compared with Turkish and Polish bank indicators. Moreover, the Georgian bank sector records a high capitalization level. This signifies commercial banks have accumulated capital to withstand higher losses than planned in case of any shocks and emergency situations. When making a comparison on the regional level, we should note TBC Bank obtained the right for placement of shares at the London Stock Exchange (LSE) amid the regional crisis and the rising conflict between Ukraine and Russia. The past years have registered no serious shocks in the Georgian bank sector, even the crisis phases have not recorded an outflow of deposits, no commercial bank has been nationalized and the bank sector is a healthy and valuable segment. All these factors have preconditioned more than 100 investors from Europe and the USA have invested more than 240 million USD in TBC Bank. I believe the Georgian bank sector will meet any challenges and shocks that take place in the economy time by time, thanks to the stable and strong system. This system remains steady and I believe we will ensure a correct navigation in this situation.
– Many customers complain that Georgia based commercial banks have set extremely high interest rates. Are these complaints grounded and what is the situation at the regional level in this respect?
– When discussing the interest rates, we should remember the customers have always expectations of taking less costs and receiving better conditions. We should emphasize two positive aspects in Georgia – in spring 2014 KPMG introduced a research report, under which Georgia has set the lowest interest rates compared to other countries in the region. I mean Azerbaijan, Kazakhstan, Serbia. In this respect we are closer to Poland, an only economy in Europe that kept growing amid the 2008 global recession. The second important factor is that along with the economic development, interest rates are also decreasing in Georgia and this is a very sensible alleviation.
At the same time, all of us should work on how to make resources more attainable, cheaper, so as the interest rates maintain positive dynamics.
– The customers also complain commercial banks show excessive caution in crediting businesses and this factor hinders a development of small and medium business sectors. Do you agree with these complaints? If you agree, why do the bank sector is so cautious?
– I think commercial banks should be provident when issuing credits to determine whether the microenvironment will be good or bad. By the way, more caution is often required in good situations, because the more positive, the less we think about the available problems. Lending and borrowing loans implies bilateral obligations between clients and commercial banks. Clients should appraise their own genuine resources and potential to identify whether they are able to serve the loan liabilities. At the same time, commercial banks should take reasonable decisions, make realistic analysis and give a correct advice to clients how adequate the requested loan is. Loans may become problematic and this aspect is also very challenging for commercial banks, because bad loans bring financial results, bad statistics and all these factors make interest rates more expensive and crediting is more restricted.
– What are the threats and obstacles hindering the Georgian bank sector development?
– We should reaffirm external factors largely determine the economic and bank sector development in Georgia. If our neighbors and partners are stronger, we will draw more investments, more tourists and the trade turnover will also increase. On the other hand, there are domestic factors – we should maintain the power and might for the bank sector stability, steadiness and quality. These two factors are decisive – professionalism of the bank sector’s staff and strong regulations that are being practiced in Georgia for many years. It is of vital importance that the bank sector regulation be carried out independently in line with the best traditions of the international practice. I believe based on these two factors the bank sector will follow the correct navigation, it will be adapted to the changes to remain one of the decisive institutions and directions for the state economy development.