The FINANCIAL -- Bank of Georgia , a leading universal bank in Georgia, has summed the results of investment deposit. The first product offered to customers was the deposit linked to the oil price. According to the results of April Bank has paid out USD 92,415 as an Additional Yield. “Additional USD 240,000 will be paid as Guaranteed Yield,” representatives of Bank of Georgia notes.

“If we assume a history could be a good predictor of the future, it is expected that oil price should continue its rebound for the next 4-6 months,” management of the bank says.

On April 28th bank calculated additional gain by the depositors. Those who bet on oil price decrease have received annual 6.7% in addition to guaranteed 9% on their six month deposit.
 
Summary Statistics of Investment Deposit Series I

Oil Linked Investment Deposit combined the features of a standard 6-month Term Deposit with 9% annual deposit rate, and the Investment Product that offered an additional yield in case oil price moved in a direction predicted by the depositor. Starting price fixed for the depositors was USD 64/barrel and the annualized return on the Investment Deposit was calculated as guaranteed 9% plus 30% from the percentage difference between oil price at 28th of April 2009 and the starting price of USD 64/barrel, if the price moved in a predicted direction. If the price didn’t move in a direction predicted by the depositor, Investment deposit paid guaranteed 9%.

Bank of Georgia Wealth Management, an originator of the Investment Deposit product, designed the product in response to market conditions prevailing that time: significant volatility of the equity markets, unprecedented risk aversion and lacklustre performance of the corporate bonds. In other words, while financial markets didn’t offer any interesting investment opportunities, Oil markets (as it usually happens under such environment), were expected to show extreme volatility. The most likely direction was price decrease, however, increase could not be ruled out.

Therefore, Bank of Georgia gave its clients the opportunity to participate in the change of oil price, while protecting from adverse price movement – whatever were to be a direction of the oil, investors were to receive guaranteed 9% on the investment. Standard rate for 6 month Term is Deposit.

First series of Investment Deposit linked to Oil Price was active 28th of October through 19th of December 2008. During this period, Bank of Georgia has collected USD 5.4 million worth of Investment deposits among which 52% were on oil price decrease, and 48% on increase. “Rally in the oil price preceding launch of the Investment Deposit has obviously affected decision of many investors.

Hindsight and Forecast of the Oil Price

There are many debates about the drivers of the oil price: geopolitical events, financial markets conditions, United States Dollar performance, trading by the “Oil Speculators” to name the few. However, recognizing importance of above mentioned factors, Bank of Georgia has been and continues to advocate that the fundamental reason for oil price direction is Supply and Demand statistics.

“We believe that oil supply/demand with a lag of several months is a leading indicator for the oil price direction”, Bank of Georgia says.

Source for Data and Projections: US Energy Information Administration

Investment Deposit – Series II

As the economic climate changes, with tangible signs of economy to start recovering in the near future:

(i) Equity markets erasing big part of last year losses, with positive YTD returns;

(ii) Spreads for corporate bonds narrowing (i.e. decreased risk perception);

(iii) Consumer sentiment in Europe and USA rebounding to close to pre-crisis levels; and

(iv) Rate of job loss stopping acceleration

It is highly likely that as financial markets stabilize, demand for oil should increase. Period of recovery is also characterized by inflation pick-up (especially under close to zero interest rate environment as it is the case now), which is accompanied by surging gold price and depreciating US Dollar. Bank of Georgia , always innovative, adjusted its offering to a new environment by launching second series of Investment Deposit.

New Series of Investment Deposits now are linked to Oil Price, Gold Price and/or EUR/USD Exchange Rate, launched by Bank of Georgia in February 2009.

The conditions of the New Series of Investment Deposit are as follows:

• Oil – This is a 6 month deposit offering guaranteed 9% plus annual 30% from increase of oil price from fixed $45/barrel. This investment is designed for Investors who want to receive handsome profit for short-term investment, due to high volatility of Oil markets. On average oil price has been changing by 18% during any 6 months period over the last 20 years. “Given current market environment and supply-demand balance, we believe that oil price shall increase in coming months”, Bank of Georgia says.

• Gold - This is a 12 month deposit offering guaranteed 10% plus 50% from increase of Gold price from fixed $900/troy ounce. Gold generally is a safe and stable investment, and it tends to increase when economy is on the road of recovery (this is primarily result of the inflationary threats), or when investors flee from other assets due to worsening economic climate.

• EUR/USD Exchange Rate - This is a 12 month deposit offering guaranteed 10% plus 100% compensation of USD depreciation against EUR. This is primarily an investment for non-USD investor who wants to invest in Oil and/or Gold product but fears losing due to USD depreciation. USD/EUR Investment deposit removes all currency risk. Likely, this can be a good investment for USD investor who wants to avoid losses if US inflation picks-up.

Written By Madona Gasanova

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