Janet Yellen is soft spoken. But when the US Federal Reserve Chairwoman speaks, the Earth shakes. Last month she took the podium at the Federal Open Market Committee (FOMC) meeting in Washington, D.C and announced the Fed will raise interest rates for the first time since 2006.
The benchmark federal funds rate will rise by 25 basis points, meaning interest rates will float between 0.25 percent and 0.50 percent. “With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate”, said the Chairwoman in a post-announcement press conference.
The move had been anticipated for much of the last quarter of 2015. On October 28, the Fed announced it was considering raising rates at the December meeting. That, coupled with encouraging US labor market data, fueled speculation that a rate rise was imminent.
National Bank of Georgia was expecting an increase, NBG spokesperson Kakha Barabadze told The FINANCIAL. “Financial markets expect the rise in the Fed interest rates with 70% probability”, he said. “The expectations of the National Bank of Georgia are near to that view.”
Yellen’s announcement is expected to foreshadow higher US interest rates across the board. Early December projections by Bloomberg predict the post-meeting federal funds rate to average .375 percent. As of December 4, average rates sat at .13 percent, according to data from the Federal Reserve Bank of New York.
Will higher rates in the US cause capital to fly out of emerging markets? Market volatility has followed Fed policy changes in recent years. When then-Fed Chairman Ben Bernanke's announced in May 2013 that the Fed would taper bond purchases – scaling back the Fed's monetary stimulus program known as “Quantitative Easing” – emerging markets such as Brazil, Turkey, South Africa and Indonesia went into a tailspin of currency depreciations and rising sovereign bond yields.
Neither was Georgia spared. The Fed's November 14 decision to cease bond purchases entirely corresponded with the Georgian Lari's rapid loss in exchange value. The GEL fell from 1.7452 per USD in the third quarter of 2014 to 2.2816 in the second quarter of 2015, according to numbers from the National Statistics Office of Georgia.
According to Barabadze, GEL depreciation – a loss in value of more than 30 percent – can be partly blamed on monetary tightening in the US:
“The exit from the quantitative easing by the Fed and the start of the quantitative easing by the ECB has significantly undermined the Lari, mainly though the trade channels. In addition, geopolitical tensions in the region also came into play weakening the economies of the trading partners.”
Could the Fed's first interest rate hike in nearly a decade cause more volatility for the GEL? Barabadze believes that Georgians can rest easy:
“Since financial markets have long been anticipating the interest rates to rise in December, the expectations already should have been reflected in the USD index with the corresponding probability ... Therefore, we do not expect a significant impact on the Georgian Lari.”
Tamar Jugheli, Research Director at the Tbilisi-based Policy and Management Consulting Group, also sees no reason to worry about higher US interest rates.
“The Fed interest rate policy change is already reflected in USD appreciation and its further appreciation should be less expected. If it happens, it will impact on Georgia through indirect channels”, she told The FINANCIAL.
Markets have had months to anticipate the Fed’s new policy, so a rapid rerouting of capital should not occur. What’s more, the GEL’s value is determined more by its relation to regional currencies such as the EUR and RUB than to the USD. While the GEL’s decline since late 2014 was caused in part by Fed monetary tightening, it owes more to falling remittances from countries such as Russia, Greece and Turkey.
“Russia and Greece were two of the largest sources for foreign currency and remittances in Georgia, and with each of those countries in recession, it would have been a miracle for the Lari to not have depreciated”, said Chase Johnson, a Research Fellow at the International School of Economics at Tbilisi State University.
After more than a year of volatility, those earning salaries in GEL will welcome news that a stronger dollar won't cause it to depreciate further. There are even reasons to expect the GEL to bounce back in 2016.
October data from the National Bank of Georgia showed that the GEL’s real effective exchange rate had fallen by 9.6 percent year-on-year. Higher export competitiveness could improve Georgia's current account position and put the GEL back on the road to recovery.
“I certainly think the CA [current account] will recover, if not in the first half of 2016, but certainly by the end of the year,” said Johnson. “Georgian exports are cheap right now.”
Irina Guruli, an economist at the Economic Policy Research Center in Tbilisi, is less optimistic. While the real effective exchange rate of the GEL has fallen, in an email interview with The FINANCIAL she remarked that it has actually appreciated vis-à-vis other regional currencies.
Her projections for 2016 are cautious: “Negative regional spillovers will continue, with decreased economic growth in Russia (major remittance source) and Ukraine (important export trade partner) … therefore pressure on the currency is likely to stay.”