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Yield on USD Denominated Deposits Shrinks

Interest rates on foreign currency denominated deposits fall, while the yield on GEL denominated deposits rise.

Depositors who have conversed GEL denominated deposits into USD are facing new problems. They have to endure the decreased interest rates or carry out conversion into GEL, however, they will lose more finances in the process of constant conversion of deposits. As to loans, specialists do not expect interest rates to increase on USD-denominated loans because the reserve coefficient has increased.

At almost all commercial banks, averaged interest rate on GEL denominated deposits makes up 11% and 3% on USD-denominated deposits. Commercial banks show less attention to EUR and the yield on EUR-denominated deposits makes up only 1.5%.

According to the official report of the national bank of Georgia (NBG), as of April 1, as compared to the same period of 2015, interest rate on foreign currency denominated deposits decreased to 3.6% from 5.2%. Almost all commercial banks have lowered interest rates on USD denominated term deposits to 3.5%, while on GEL-denominated deposits the interest rate exceeds 11%. In the last year the averaged interest rate on GEL-denominated deposits did not exceed 9%. It should be also noted that following the GEL exchange rate strengthening, the dollarization ratio in deposits declined by 1% for a month. This statistics suggests that today the national currency remains the most in-demand currency for commercial banks.

Specialists explain increased interests rates on deposits. First of all, the demand for USD has evidently fallen. The misbalance makes up about 1 billion USD. Secondly, the national bank of Georgia has increased the coefficient of foreign currency reserves to 15-20%. This signifies that the USD resources have become expensive for commercial banks and they find it useless to pay high interest rate for it. Thirdly, the national currency rate stabilization and further strengthening expectations have restored the confidence in GEL to a certain degree.

It should be noted in March 2016, as compared to February 2016, the bank system’s deposit liabilities decreased by 347.8 million GEL (down 2.4%) to 14.6 billion GEL as a result of reduction in foreign currency denominated deposits.

The volume of GEL-denominated deposits increased by 42.5 million GEL (up 1%) and equaled 4.17 billion GEL. The increased ratio of term deposits has also driven a growth in national currency denominated deposits.

GEL resources in individual deposits makes up 36.1%. Foreign currency denominated deposits increased by 0.8% (31.8 million USD) and marked 4.27 billion USD at the end of the reporting period.

The deposits dollarization indicator in March 2016 decreased by 1% to 70.8%. The dollarization coefficient of corporate and individual deposits made up 61.1% and 81.4% respectively in late March.

Economist Mikheil Tokmazishvili says that in summer period, especially at the expense of intensified tourism season, USD inflow to Georgia will increase and the demand for GEL will further grow. Therefore, commercial banks prefer to attract GEL resources.

“I do not possess latest updates on the demand for USD. The one thing is clear. The imports shrink. Moreover, USD inflows to the country grow. Tourism seasons is intensified, new festivals will be held”, Mikheil Tokmazishvili said.

Formation of interest rates on foreign currency denominated deposits are related to specific currency demands, as well as on balance of payment, exports-imports correlation and so on, he added.

 “If the national bank grows the foreign currency reserve ratio, this signifies it has restricted foreign currency inflows. On the other hand, the NBG carries out smooth policy and shrinks the reserve ratio in the national currency. This signifies higher volumes of GEL will be supplied. Consequently, the demand will increase in the national currency and commercial banks will have to  increase interest rates on GEL denominated deposits.

However, it is difficult to make such a conclusion in the short-term period, because the correlation of interest rate to the currency rate may be considered in only long-term perspective”, Mikheil Tokmazishvili said.

Specialists do not rule out that in summer period interest rates on USD denominated deposits fall to 2.5-3%.

As to credits, averaged weighed annual interest rate on foreign currency denominated loans decreased by 0.1% to 9.9%, while the interest rate on GEL denominated credits declined by 2.4% to 20.9%.

In case of GEL-denominated loans, interest rates on individual loans declined by 2.2% to 25.6%, while increased for corporate clients by 0.5% to annualized 14.5%.

In case of foreign currency denominated loans, interest rate on corporate loans have not changed and remains annual 10.0%, while the interest rate has decreased by 0.3% to 9.9% in case of physical bodies.

In the reporting period, as compared to March 2015, interest rates on foreign currency denominated loans decreased by 0.7% to 9.9%.

Economist Lia Eliava says that interest rates on USD-denominated credits will increase. The reserve requirement of commercial banks is just a mechanism for lowering credit multiplier.

“Commercial banks borrow USD at 1-3%. The national bank charges 2% on the reserve. Commercial banks do not bear much loss. In some countries, the reserve ratio makes up 25-28%. 

This is a quite efficient monetary mechanism to reduce USD-denominated loans and increase the larization in the economy. Therefore, I do not expect USD-denominated loans will increase in value”, Lia Eliava said.

According to official indicators, in March 2016, as compared to February 2016, crediting by commercial banks in the economy decreased by 241.4million GEL to 15.62 billion GEL. The credit portfolio base was reduced after indicators of foreign currency denominated loans declined. The total credit portfolio dollarization coefficient declined by 0.9% to 64.9%.