Moody’s Views Depreciation of Georgian Lari in a Global Context

Moody’s Views Depreciation of Georgian Lari in a Global Context

Moody’s Views Depreciation of Georgian Lari in a Global Context

The FINANCIAL -- Moody’s, one of the big three credit rating agencies, views the ongoing depreciation of the Georgian Lari in a global context. According to the agency, volatility in global financial markets has affected the outlook for the currencies in several emerging markets. With GEL 2.4161 against USD 1, on 26 August, the Georgian Lari has reached its lowest level since 1999. While Moody’s explains the ongoing devaluation as due to the volatility in global financial markets, the Georgian PM asserts that nothing is happening to the macro-economy and we have overcome this stage. The PM has blamed the media for creating a sense of panic.

Despite optimism about the summer season and a big inflow of travellers, the Georgian Lari has been far from stable during this top tourist season. On 26 August, the Lari was at 2.416 against the US Dollar, near the all-time low of 2.4510 in February 1999. The previous low point this year occurred in May, when USD 1 was GEL 2.3637. The Georgian Lari began its depreciation in November, 2014. At that time USD 1 was worth about GEL 1.75.

The Georgian Government remained optimistic and blamed the media and analysts of being incompetent and engaging in speculations. Georgian PM Irakli Gharibashvili stated that nothing special has been taking place either in the local or macro-economy. On the contrary, he stated that such a stage has been overcome.

Both the finance and economy ministers supported the PM, saying that nothing important was happening. Finance Minister Nodar Khaduri expressed confidence that the Lari will soon stabilize. He said that by the end of the year, the Government expects about one billion Lari in income and plans not to spend it to avoid greater market pressure.

Economy Minister Giorgi Kvirikashvili told journalists that the reason for the drop in the Lari’s value is not domestic but due to external factors. Both he and Khaduri remarked that speculation played a role in this process. Previously, Giorgi Kadagidze, President of the Georgian central bank, said that the companies in this period are reserving dollars, which is having a negative impact on the national currency.

In just a day, on 27 August, the Lari has strengthened against the USD by reaching 2.3771 and 2.3465 on 28 August.

“We view the depreciation of the Lari in a global context. Volatility in global financial markets has affected the outlook for the currencies in several emerging market countries, including Georgia. In addition to the depreciation of the Lari by 5.8% between 27 July and 24 August, the Brazilian Real, Indonesian Rupiah, South African Rand, and Turkish Lira have all depreciated between 4.3% and 6.2%. Other currencies have depreciated by much more over the same period: the Belarusian Rouble by 10.8%, the Russian Rouble by 18.8%, and the Kazakhstani Tenge by over 20%,” Ernest Sergenti, Assistant Vice President and Analyst in Moody’s sovereign group, and the lead analyst on Georgia, told The FINANCIAL.

“In addition, the slowdown in economic growth in Russia and other neighbouring countries has led to a decline in inward remittances to Georgia and a widening of Georgia’s current account deficit, which also tends to produce a depreciation of the exchange rate,” Sergenti added.

According to Alexios Philippides, Analyst in Moody’s banking group, from the banking sector’s perspective, a sharp depreciation of the local currency would severely affect the ability of borrowers whose income is in the Georgian Lari to repay foreign currency loans, which could translate into asset quality pressure for banks, also requiring higher provisions and hence pressuring profitability. “Partly mitigating this issue is, however, the additional 75% risk-weight for these un-hedged borrowers applied by the central bank under its Basel II/III capital requirements, which ensures banks have additional capital buffers to counter this risk,” Philippides said.

Since the beginning of the devaluation of the Lari, the Georgian ruling party has been constantly blaming National Bank of Georgia for the devaluation. On its side, the NBG has been indicating for an improper fiscal policy. As a result, the Georgian ruling party initiated the removal of supervisory functions from NBG. Last week, Zurab Tkemaladze, Head of the Economy and Economic Policy Committee in the Georgian Parliament, expressed his optimism in a TV interview that the currency devaluation will be resolved from October when the new bill regarding supervisory functions of NBG comes into force.

The Georgian President vetoed the bill on 31 July but the veto will be overturned by the Parliament after new sessions resume in the autumn.

Kadagidze, NBG’s president, has been expressing concern that the new bill would have a negative impact on the Georgian banking sector and the whole economy. However, Philippides, Moody’s, does not think that the creation of a new bank supervisory body would negatively impact the Georgian banking sector.

“Provided that the proposed agency remains operationally independent and governed in line with international best practice, and a smooth transition is made that ensures the continuity of experience and expertise in banking supervision, the creation of a new bank supervisory body would not negatively impact the Georgian banking sector,” said Philippides.

“However, we view the NBG as an effective supervisor that has managed to maintain financial stability in the past through significant shocks (with the assistance of international donors and institutions), such as the 2008 conflict with Russia and the subsequent global financial crisis. Furthermore, the IMF, in its recent Financial System Stability Assessment for Georgia (published December 2014), commented positively on the steps the NBG has been taking to strengthen banking regulation and supervision that exhibit a very high degree of compliance with international standards,” Philippides told The FINANCIAL.