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GEL Exchange Rate not Expected to Show Extreme Volatility

The Georgian national currency is not expected to extremely strengthen and this issue has been excluded from the agenda. Various macroeconomic indicators suggest that the national currency is incapable to extremely strengthen positions against USD. At the same time, external factors affecting the Georgian economy have been minimized and no extreme depreciation is expected.

After the last 18 months, on June 10 the lowest exchange rate of 2.12 GEL was fixed on the Georgian currency market. After major interventions by the NBG (250 USD extracted), the GEL depreciated again. On August 9, the GEL exchange rate fell to 2.35 point and new panic arose in the population. Besides the NBG interventions, this tendency was deepened because of payment of external state debts.

Economic expert Mikheil Dundua says that the GEL exchange rate depreciated mainly because of payments of external debts.

“This year both private and state sectors of Georgia had to pay total of 4.780 billion USD external debt. This is a peak indicator and equals 34% of GDP. Supposedly, a major part of the debts has been paid and the National currency exchange rate is being stabilized”, Mikheil Dundua said.

On August 13 the GEL exchange rate started strengthening against USD and as of August 24 currency exchange booths were selling one USD for 2.26 GEL. This period has not recorded extreme fluctuations, the NBG, warned of extreme strengthening in spring, purchased 20 million USD to halt quick strengthening of GEL. The National currency started depreciating the next day.

Seemingly, the NBG members thought they had taken exaggerated decisions and on August 25 they purchased 20 million USD at 2.2976 exchange rate, while they had sold the same amount at 2.2814 exchange rate on August 22.

Before, deputy economy minister Nikoloz Gagua released  forecast  that by the end of 2016 the national currency would strengthen to around 2.2-2.25 exchange rate.  In this time, a part of economists explained that  reduction of  current external liabilities and improved external factors had stabilized the GEL exchange rate.

“Seemingly, the Government has paid a major part of the debts and the national currency exchange rate started slightly strengthening. This tendency is driven by increased investments, increased money transfers to Georgia and revenues from tourism sector. Since the major part of debts were paid,   GEL exchange rate started strengthening irreversibly. According to my calculations, the national currency will continue strengthening to under 2.25 point.

At this stage, GEL exchange rate is rising at moderate paces and this factor enables the business sector to meet this process ready. This tendency is important for our population too, because strengthened GEL will alleviate their loan burden too, especially for those who have taken loans in USD”, Mikheil Dundua said.

Meanwhile, the National Bank categorically refused connection of external debts with the GEL exchange rate. They published a special schedule proving that the country has to pay similar amount of liabilities every year.

The NBG representatives explained that the schedule of payment of external debts is prepared according to the joint  international methodology and it reflects all debts, including those that will not become mandatory for the country to pay ever.

Namely, the schedule comprises those obligations that must be paid within one year. At the same time, this category implies debts that must be paid “immediately”. These are obligations the payment time of which have already come, moreover, this time is even overdue.

The NBG representatives explained that as of March 1 the country had to pay quite significant amount of debts (approximately 1.6 billion USD as of March 31, 2016). A major part of them is not paid in practice.

“Moreover, the deposits that represent a bulk part of this amount are never made entirely, because a part of deposits is covered and new deposits are attracted instead of them. This signifies the volume of deposits grows on permanent basis”, the NBG representatives explained.

In case of inter-company loans,  debts are transformed into stock capital frequently. For example, in the first quarter of 2016 similar huge operation was carried out – approximately 700 million USD was moved  to the stock capital. Information about the company is not divulged because of commercial confidentiality.

This amount had been indicated in the schedule for many years as immediately payable sum, but the investor directed it to the stock capital instead of payment.

According to the schedule published by the NBG, debts that must be paid within a year was 4.751 billion USD in 2012, 4.777 billion USD in 2013, 4.661 billion USD in 2014, 4.780 billion USD in 2015 and 4.223 billion USD as of March 31, 2016.

“This is a very significant sum, but this is not the debt that the country must pay. Out of this 4.7-4.8 billion USD, deposits (1.5 billion USD) and overdue debts (0.8 billion USD) are not paid in practice. Trade credits (0.7 billion USD) are partly paid (about a half part) through supply of goods and services and the remaining part of 1.5-1.8 billion USD are long-term and short-term loans and loan securities”, the NBG representatives said.

The year of 2012 will be the most critical one  in terms of debts payments, when the country will have to pay Eurobonds, but in that period old debts may be covered through issuance of new securities, Archil Mestvirishvili, vice president of the National Bank of Georgia (NBG) said.

At the same time, Mestvirishvili told the Georgian Public Broadcaster (GPB) that influence of external factors on the Georgian economy has been reduced. Therefore, the NBG forecasts 5% economic growth in 2017. This signifies the GEL exchange rate will not fall even if it does not strengthen. It should be also stressed that in July the demand for USD slightly declined. According to official indicators, in that period total turnover of USD/GEL  on interbank currency market (without the NBG interventions) made up 82 million USD, down 4.1 million USD (-5%) compared to the previous month’s turnover, but up 82% compared to the same month of 2015.

At the same time, quantity of deals made by commercial banks have declined by 24% month on month (but grew by 71% year on year).