“The Georgian banking sector is in a good shape to support further economic growth in the country,” said Giorgi Kadagidze, Governor of the National Bank of Georgia.
In the Governor’s view, the Georgian banking sector emerged from the global financial crisis and the impact of the Russian invasion in a substantially good condition, which was due to solid pre-crisis capital and liquidity positions of banks, the support of international financial institutions as well as the countercyclical fiscal, monetary and supervisory policies, all of which softened the impact of these events on the domestic economy and asset quality of Georgian banks.
“At present, the system maintains comfortable liquidity and capital positions coupled with improved profitability indicators, which suggests that that the banking sector will sustain and support economic growth in 2011,” Kadagidze added.
“Needless to say, some downside risks exist. Market participants should make balanced decisions reflecting on mistakes made in the past. At the same time, as a small open economy, Georgia remains vulnerable to global imbalances. Fragile recovery in developed countries and risks of overheating in emerging markets may pose new imbalances, which should also be taken into account,” Kadagidze concluded.
Over the past year, the NBG employed monetary as well as macroprudential measures to tighten policy and ease domestic inflationary pressures. These pressures arestill high but are caused by a number of external factors, including rising food and commodity prices worldwide. In the Governor’s view, the monetary policy should take into account the risks of damaging economic activity and react on demand driven inflation as well as possible second round effects of cost driven one.
In his interview with The FINANCIAL, Mr. Kadagidze spoke about inflation, larizationeffect, as well as interest rates and future potential of Georgian banking sector development.
Q. From the year 2009 and during 2010 the banking sector’s main strategy was to offer high interest rates on deposits. While at the end of 2010 the trend changed and banks chose to decrease interest rates on deposits. In your opinion, what were these changes governed by?
A. Retail and corporate deposits of the banking system were affected by a number of shocks in 2008-2009 - confidence shock instigated by the Russian invasion in 2008 and withdrawals during the 2009 recession. In response to these shocks, the Georgian banks took a conservative stance on liquidity buffers carried on their balance sheets while maintaining credit activity muted until the beginning of 2010.
In 2010, private-sector deposit growth gradually rebounded on the back of recovery and strong macroeconomic fundamentals, which mitigated the banks’ concerns relating to uncertainty about liquidity risk. As a result, the banking sector’s offered deposit rates have gradually decreased.
Q. In interviews with The FINANCIAL, key company representatives have declared that the high interest rates on loansare due to increased costs of external borrowings. In your opinion, how realistic is it that the Georgian banking sector becomes wholly dependent on internal rather than external sources of funding?
A. Over the past year, NBG did not observe any major increases in the cost of borrowed funds that would explain and/or support the statements made by some of your respondents. At the same time, we believe that there are a number of other variables that explain recent loan interest rate trends in Georgia, such as higher liquidity buffers and credit risk premiums.
The Georgian banking system, as well as any liberal emerging banking market, relies on a mix of foreign and domestic funding.Capital accumulation, as well as increase in total factor productivity, is essential for economic growth.In an emerging market, such as Georgia, rapid accumulation of domestic capital can only be achieved at the expense of consumption and quality of living. Consequently, many fast growing emerging markets access external sources of funding to compensate for low domestic savings rate and accelerate the growth of the economy.
While the benefits of external funding are evident, banks are expected to manage their wholesale funding,which is predominantly external and long-term, with the goal of minimizing refinancing risks through diversifying sources of external wholesale funding and minimizing substantial concentration of repayments in a single maturity bucket. Overall, it is the NBG’s view that the funding mix of banks operating in Georgia should complement the resilience of the system as a whole.
Q. High interest rates on deposits make it attractive for foreigners to open deposits in Georgia. If the volume of inflow of foreign deposits is increased, what tendencies will it cause?
A. The majority of bank deposits are those of Georgian residents with the share of non-residents’ deposits reaching less than 10% as of January 2011. However, the share has been growing steadily over the past several years suggesting international investors’ growing confidence in the Georgian banking market.
NBG commissioned research into the behavioural characteristics of non-residents’ deposits during the turbulent 2008-2009period. The team found no empirical evidence suggesting that these deposits marginally contributed to the flightiness of the banking system’s funding. It is the NBG’s view that non-resident deposits provide funding source diversification benefits, while over-reliance on such non-core funding sources may lead to greater uncertainty going forward and significant deterioration in the liquidity risk profile of the system’s funding base. Even though the share of non-residents’ deposits is moderate, NBG intends to take relevant measures targeted at ensuring viability of banking institutions’ funding vis-à-vis the potentially disruptive impact of international speculative inflows.
Q. In your opinion, how attractive is the Georgian banking sector for potential investors?
A. As of 31 December, 2010, banks with foreign capital participation accounted for 94.1% of the system’s total assets and 91.6% of the system’s total capital. Strategic investors, including European and regional banking institutions, as well as IFIs are well-represented in the banking system of Georgia. The country’s two largest banks have foreign shareholders, Bank of Georgia , which is listed on the London Stock Exchange, and TBC Bank , which is owned by IFIs (EBRD, IFC and DEG). Other foreign equity holders in the Georgian banking sector are international and regional strategic investors, such as Procredit Group, SociétéGénérale, Liberty Investments Holding, HSBC , Bank VTB , Dhabi Group , PrivatBank, BTA Bank, International Bank of Azerbaijan, Halyk Bank of Kazakhstan and Ziraat Bank and others. Banks, which are majority-owned by local investors, are Cartu Bank, Basis Bank , Bank Constanta and Progress Bank. Overall, increasing international ownership has been a supporting factor in shaping a liberal, competitive and resilient local banking market.
So, I would say that the market is pretty attractive, but at the same time very competitive.
Q. Annual inflation reached 12.3% in January, 2011. The mentioned inflation exceeds theNBG’s target level. What tools does the NBG use for dealing with inflationary pressure?
A. NBG’s target is 6%annual inflation in a medium term.It is worth mentioning here that 6% inflation target does not mean thatin the short tern inflation will not deviate from the target level. Due to the lag in the impact of the monetary policy instruments, the NBG considers and targets forecasted inflation rather than current changes in the price level.
On the back of rising expected inflation, the NBG started to tighten monetary policy in June 2010, when inflation was still low. The NBG employed several monetary policy tools to target inflation: interest rates, minimum reserve requirementsand open market operations. In line with Basel III stance on the importance of macroprudential policy, the NBG tightened liquidity and capital adequacy requirements.
NBG employs a set of strategies for different underlying causes of inflationary pressures as some of the anti-inflationary measures may, under certain scenarios,have counterproductive impact.
More than 40% of Georgian CPI basket is food, therefore,the increase of food prices due bad harvest, domestically and worldwide, has larger effect on Georgian CPI compared to the countries where share of food is lower. It should be mentioned that some countries use so called core inflation as an inflation target, which excludesfood and energy prices.
Central banks do not react to increased prices due to supply shock, if it does not influence inflationexpectations. The response to such types of shocks means to reduce crediting economy and decrease its growth rate, and when the external shock is over, then to move to expansionary policy. If the shock has a short-term character, the action of the central bank will increase the volatility in the economy, including unnecessary fluctuations in employment.
To sum up, NBG has pre-emptively responded to a probable demand-side increase of inflation. As a result, the share of non-exogenous factors in the 12.3% inflation rate is quite low – less than 3 percentage points.As for other factors causing increase in price level, they are of a temporary nature, and the NBG will not react to themfurther unless the inflation expectations increase. Consequently, we pay relevant attention tobuild the NBG credibility further, which is the foundation for the right inflation expectations. As I have mentioned, if the inflation expectations do not increase, NBG will not need totighten monetary policy and price stability willbe achieved with less social costs.
Since adopting the inflation targeting regime, the NBG has much more instruments and influence on prices than it had under the monetary targeting regime. NBG is ready to use all of its available tools asnecessary.
Q. In February, the GEL depreciation against the USD reversed, and since then Lari has been appreciating. Did this happen because of the NBG intervention?
A. Georgian currency is freely floating and, consequently, NBG interventions in theforeign exchange market are minimal. Since the beginning of the year, NBG intervened only sixtimes, three times on the sale side and three times on the purchase side.
The exchange rate is defined by the foreign exchange market, which involves many participants, including anyone who converts its currency. The market forces guarantees that exchange rate is in the equilibrium, which, in turn, is important for economic growth and macroeconomic stability.
Moreover, the Georgian currency hasbecome more flexible since March 2009, when NBG switched to a modern intervention method - foreign exchange auction. Since then, the short term fluctuations have increased, which guarantee the major macroeconomic function of the exchange rate – shock absorption. As a result, GEL isstable in the long run, without NBG interventions.
Q. The main initiative of NBG was Larization in 2010. However, the share of GEL has not changed significantly. In your opinion, what steps should be undertaken to increase the share of GEL in deposits as well as loans?
A. Larization is not amandatory process, butan opportunity for individuals to take loans and open deposits in the desired currency. If an individual gets itssalary in GEL, it is more convenient for him/herto get a loan in thelocal currency. In such a way, the individualwill be protected from exchange rate risk. High dollarization carries many problems for the country’s economy. The goal of the NBG is to make long term and low interest GEL loansmore accessible. Larization is a long term goal of NBG, as it is impossible to decrease dollarizationin the short term.
To decrease dollarization, NBG is working in several directions, such as thesupport of GEL money market development, incentivesfor commercial banks to find resources on local markets. NBG aims to stimulate commercial banks with market methods, so that they actively work in local markets to bring in more deposits in the national currency and be less dependent on more risky sources for financing credit activities, such as loans from external sector or deposits in a foreign currency.
The development of the GEL market should be noted separately. The developed money market creates the opportunity to bring capital into the local market for commercial banks, supports the reduction of dependency on external sources and,hence, the decrease of dollarization. In 2010, there was significant increase in the GEL money market; however, the market is still atthe early stage and we continue reforms for farther development.
Our approach is forLarization to make this as an irreversible process. The reforms conducted by NBG guarantee creation of a favourable environment for Larization, bringingthe desirable outcome in the near future.
Q. What is the attitude of NBG towards advertising transparency? What outcomes did NBG activities bring from this side?
A. One of the NBG’s key priorities is to ensure maximum transparency of financial institutions’ communication and interaction with customers.In 2009, the NBG drafted an action plan with the purpose of gradual strengthening of consumers’ rights at the financial sector. Within the framework of the action plan, the NBG has recently approved The Rule on the Disclosure of Information. The rule regulates and defines disclosure requirements in the course of contractual and subsequent relations. In accordance with the provisions of the rule, banks have to discloseeffective interest rates including all finance charges, the rights of parties to amend important terms of the contract and other material termsof a contract with a consumer. It is the NBG’s medium term plan to amend the rule to define disclosure requirementsduring the client acquisition process, including advertising and advisory practices. A newly formed consumer protection division will monitor the protection of consumer rights, collect and publish statistics in this area, answer calls on consumer hot-line and provide recommendations. Depending on the problems identified, the division will also facilitate and promote relevant legislative changes.
Q. How protected and confidential isinformation about client held at thebank?
A. The Law of Georgia on The Activities of Commercial Banks defines bank secrecy principles and rules. Specifically, Art. 17 of the law states that it is prohibited to disclose or reveal confidential information. The definition of such confidential information includes information available at the bank about client’s accounts and account balances. Therefore, commercial bank is responsible for confidentiality and non-disclosure of this sensitive information with the exception requiring banks to disclose such information upon the delivery of relevant court decision.
Q. What was the total financial aid received by the NBG in the last two years for developing the banking sector, and what activities were conducted within its framework?
A. NBG is a long-term partner of numerous international financial organizations and donor institutions. Over the course of the past several years, a number of important initiatives aimed at strengthening prudential regulation have been implemented with the help of our international partners. Some of these initiatives are assistance in developing mechanisms for hedging bank’s OCPs and stress testing (International Monetary Fund), assistance in the assessment of banks’ and non-bank institutions’ investments and acquisitions (World Bank), development of the policy for capital adequacy charge for interest rate and equity risks (World Bank), implementation of the consolidated supervision (Asian Development Bank), IFRS transition (Asian Development Bank), enhancement of risk based supervision (Asian Development Bank).
Another initiative that we would like to highlight was implemented with the help of the World Bank in 2010. The aim was to bring regional supervisors together for a workshop to discuss post-crisis prudential responses and their efficiency. Sharing experience with our regional colleagues and partners promoted exchange of information and improved understanding of best practices in supervisory responses to banking shocks.
NBG received significant financing from the USAIDand technical assistance from the World Bank for implementing modern interbank paymentssystem.
With the initiative of NBG and financial assistance of ATTF and the Luxembourgish Government experts were invited toconductseries of seminars in the risk management and Basel II implementation fields.
We gratefully appreciate support from our international partners. |
