The governor of the National Bank of Georgia, Koba Gvenetadze has announced 2018 to be “a year of financial education” and discussed plans that will be implemented together with financially literate society, who will no longer be afraid of exchange rate volatility.
The governor also reviewed the major challenges of 2017, in particular the high inflation and dollarization. Koba Gvenetadze stated that the challenges will be overcome by the NBG’s strategic policy, which is oriented on long-term economic growth, rather than short-term effects.
-What were the key challenges of 2017, how were they neutralized and how has the regulator contributed to this process?
– Let’s start with the fact that we live in a rapidly developing and changing economic environment. Hence, to mitigate the negative impact from shocks, we have to constantly overcome the difficulties. From the challenges of last year I would first of all highlight the high level of inflation. Influenced by one-off factors (such as the increase in the excise tax and the growth of oil prices on international markets), inflation exceeded the target throughout the year; however, once we exclude these factors, inflation during the year fluctuated around 4% which was the target rate of the NBG in 2017.
The NBG’s monetary policy should not be oriented on neutralizing short-term, one-off factors affecting inflation, as such actions will harm long-term economic growth. Thus, in an inflation targeting regime, temporary deviations from the target in short-term period are admissible, provided stable inflation environment will be maintained in the medium term.
Communication is of crucial importance for the inflation targeting regime. Namely, efficient operation of this regime requires the NBG to clearly explain the reasons behind the deviation from the target, as well as the how inflation will return to the target level. In this respect the NBG has further strengthened communication through various sources, such as press-releases of monetary policy committee meetings, monetary policy reports, news conferences, etc. In the reports mentioned above the NBG stressed that the increase in inflation was due to one-off price increases that will have only a temporary effect on the inflation and starting in 2018 the inflation will decline. Moreover, in order to curb inflation expectations, the NBG has raised monetary policy rate several times throughout the year. In November, annual inflation stood at 6.9%. However, as I have already noted above, along with the exhaustion of the temporary factors, we expect the inflation level to gradually decline in 2018.
In 2017, high dollarization has remained a major challenge to the economy. Over the past years the National Bank of Georgia has already been promoting dedollarization process, however, in 2017, the NBG was particularly active in this regard. Namely, the NBG in coordination with the government of Georgia, developed a 10-point larization plan, that included the clauses on increased accessibility of long-term GEL resources, adequate sharing of FX risks and mandatory GEL pricing. Some of the points have already took effect, while we continue to actively work of others. We have numerously said that larization is a long-term process and we should not expect a significant changes in the short-term. However, some positive trends have already been observed in terms of decrease in dollarization throughout the year. For example, loan dollarization in the banking sector has declined from 65% in 2016 to 55% by the end of 2017. In the same period individual loans dollarization decreased by 13 percentage points to 45%. There is a certain progress in terms of deposit dollarization, which has declined to 65% from 71% over 2017.
Communication is important for any central bank, however, as I have noted above, it is even more crucial for inflation targeting regime as under the latter inflation expectation is one of the most important factors determining inflation. Thus the objective of the NBG is to shape inflation expectations. Over the past years we have taken a number of steps in this direction, gradually increasing public awareness on the objectives of the NBG at the same time supporting the efficient management of inflation expectations. To that end, we have revised the structure of NBG publications and renewed the monetary part of the website. On a quarterly basis, after monetary policy committee meetings, we hold press-conferences and meeting with analysts, followed by the publishing of monetary policy reports. This year we started organizing the committee meetings in different regions of Georgia. During our visits we hold direct dialogues with the representatives of local businesses, discussing the reasons behind the committee decisions and analyzing expected results. Along with monetary policy reports, we publish a short video, where the governor of NBG overviews key issues and forecasts given in the report. NBG will continue to expand its communication with the public in 2018 too.
An important event taking place in 2017 was the renewal of the IMF program. We have agreed on a new program of Extended Fund Facility. The aforementioned program will assist the country in reducing economic vulnerability and promote economic growth through coordinated policy. The agreement on the IMF program is a signal to investors that Georgia’s macroeconomic policy is on track and as a result, the investors will show greater interest in our country. IMF has positively assessed NBG’s performance under the inflation targeting regime, especially the monetary policy response to the 2014-2015 external shocks. This has contributed considerably to the new agreement with IMF.
In 2017 international credit rating agency Moody’s has raised Georgia’s sovereign credit rating from Ba3 to Ba2. NBG’s monetary policy response to the external shocks has again played a positive role, as Georgian economy has become more competitive. Moreover, Georgia’s economic growth forecasts are higher compared to other countries of the region. Positive economic outlook is the key factor that has increased Georgia’s credit rating and this has happened for the first time over the past 6 years.
-Did commercial banks contribute to the sector stability and what threats have been minimized by the improved supervisory mechanisms?
-In terms of banking supervision, the amendment that introduced the classification of assets determining Payment to Income (PTI) and Loan to Value (LTV) ratios is of crucial importance. The amendment has limited the commercial banks’ ability to issue unsecured retail loans through introducing additional capital requirement thus protecting citizens from excessive indebtedness.
Changes related to supervisory capital are also very important. Namely the minimal supervisory capital requirement were raised for the operating commercial banks and those seeking banking licenses. In addition, capital requirements were updated according to the Basel standards. In particular additional capital buffers that comply with the Basel requirements have been introduced, including conservation, counter-cyclical and systemic buffers. Systemic commercial banks were identified and specific deadlines were set for them to introduce the buffers. Significant decisions have been made in relation to transparency, according to which commercial banks must publish quarterly and annual reports on capital adequacy, risks management, renumeration of the top management and corporate management issues.
From the point of view of adjusting to the international standards, the introduction of liquidity coverage ratio (LCR) was another significant step that has enabled more efficient identification, appraisal, monitoring and control of liquidity risks.
-What are your plans for further protection of consumer rights?
-NBG is implementing important projects for protection of consumer rights. As you may be aware, last year, a number of amendments were made to the legislation (limits for expenditures on loans were determined, money attraction from population was restricted, coverage area of regulations for protection of financial market consumers rights was expanded). However, to protect consumer rights, we continue working on further harmonization of the current legislation with the European standards. It should be noted that on 23rd of December the Parliament of Georgia adopted a package of amendments in relation to the financial sector by third hearing. At this stage, the NBG’ regulates a significant part of the financial market, but not the whole. Once the aforementioned amendments are implemented the NBG acquires a full mandate to regulate all entrepreneurial bodies issuing loans with the aim to protect consumer rights, promote sound competition and establish responsible lending practices. However, it should be also noted that a certain time is required to implement all the aforementioned projects.
At the same time, together with other stakeholders we are working on the development of regulatory framework for credit-information bureaus in order to promote financial stability, ensure information safety and continuous operation of credit-information bureaus to protect consumer rights. This is of vital importance for maintaining financial stability and protecting physical bodies from excessive indebtedness. This initiative will boost competition on crediting market, reduce fragmentation and asymmetry of information, lower credit risks and, promote the development of a responsible credit system.
Over the past years, the share of microfinance organizations in the financial system has considerably increased and today this share is equal to 6%. On the one hand, with increased competition on a market the lending procedures have been eased, while on the other hand tendencies of attraction of the finances from the population have become of note.
Thus, significant steps were taken for tightening the regulatory framework for microfinance organizations. To briefly sum up the initiated bill, microfinance organizations, which operate with their own capital, will not be subject to tight supervision, except for the cases when consumer rights are violated, so the pricing is as transparent and adequate as possible. At the same time those microfinance organizations, which attract money resources from population, will be subject to stricter supervision – new standards of supervision and reporting will be introduced for those MFOs, setting the capital adequacy and minimal level of liquidity requirements.
This year we started an inspection of financial organizations in terms of compliance with the legislation for consumer rights. These inspections will be intensified in 2018. Several microfinance organizations were fined for detected violations in 2017, however it should be noted that our inspections are not focused on imposing sanctions, but rather used to ensure that microfinance organizations meet consumer rights protection standards. If the detected violations openly show that microfinance organizations have tried to deliberately ignore the legislation, we will not tolerate such actions, but if laws are violated as a result of misinterpretation of legislation, in this case, main accent will be made on eradicating and correcting violations. There were cases, when incorrectly charged money was returned to the consumer.
As noted, many legislative amendments were adopted over the last years. However, to protect consumer rights, it is not sufficient to oblige the regulated organizations to respect the legislation. It is necessary to consult the regulated organizations and explain the legislation. We think publishing explanatory documentation, direct meetings and trainings will be one of our key priorities in 2018. Our objective is to minimize consumer rights violation cases, which may be the result of ignorance of law or misinterpretation of legislation.
-You have noted that the year of 2018 is the year of financial education. How do you greet the New Year in this respect?
-Consumer rights protection and financial education are priority directions for the National Bank of Georgia. In order to raise public awareness in terms of financial literacy and its benefits we have decided to announce 2018 as the year of financial education.
In 2016 with the involvement and support of domestic and international interest groups, we have approved a national strategy for financial education and created the strategy management committee, which includes public, private and civil sector representatives. At this stage, we cooperate with this committee, work on the action plan for the next year and will introduce the final agenda at the beginning of 2018.I would like to note that we plan to implement many projects throughout 2018 in Tbilisi and various regions of Georgia to cover as many citizens as possible regardless of their age, residence and profession.
We will introduce audio-video and printed educational materials; games, competitions adapted to various target groups; meetings and lectures; educational camps and so on.
We plan to actively use radio, television and Internet channels, including social media. Our objective is to make financial education issues popular in all circles. Therefore, media involvement and support are of crucial importance for implementing the project and expanding the scale. Consequently, as a part of the financial education year, we plan to actively and productively cooperate with the media.
– Regarding the banking sector – does the concentration create threats and how are they counteracted? How attractive is the Georgian market today for new players? How should we transform the existing interest into real actions?
-Currently, there is certain concentration in the banking sector. Namely, the share of two major commercial banks in the sector’s total assets exceeds 70%. Despite this fact, the sector records growing competition and this was reflected in the reduction of interest rates.
NBG watches the market dynamics and we will develop corresponding macro-prudential instruments. To that end, in December 2017 we approved a decree on Definition of Systemic Commercial Banks and Introduction of Systemic Buffers. As a result, NBG has introduced additional capital buffers for systemically important commercial banks and has set deadlines for the implementation of new standards. One of the objectives for introduction of these buffers is to reduce concentration and boost the competition.
It is important that the banking system remains open for new strong players. Georgia provides high transparency for requirements imposed on financial sector. Requirements for obtaining the banking licenses are given in the legislation in details and NBG is ready to supply additional information to potential investors. At the same time, in the decision-making process we take into account the presence of the minimum supervisory capital (at least 50 million GEL) and experience of potential owners in the banking/finance sector, adequacy of submitted business plan and potential for stable operation.