NBG publishes 2020 Financial Stability Report
By Natalia Kochiashvili
Friday, October 2
The National Bank of Georgia, (NBG) has published a 2020 financial stability report, which presents an assessment of the challenges and risks in the financial system and focuses on the medium and long term, the structural characteristics of the financial sector, and the aspects of the Georgian economy that are important for financial stability. The report also includes an analysis of the resilience of the local financial system and reviews the measures taken by the Financial Stability Committee to promote financial stability.
On the growth of the country’s external debt, the report said that the increased risk premium and local currency depreciation during the Covid-19 pandemic were reflected in the increase in the debt service burden. At the same time, financial resources mobilized to mitigate the recession caused by the pandemic have increased foreign debt.
According to the NBG, the ratio of total external debt to GDP has been stable in recent years, although this figure remains high. Georgia's foreign debt is mainly denominated in foreign currency and, consequently, is significantly vulnerable to exchange rate risk.
Although Georgia's total debt ratio is not significantly higher than in other emerging economies, the government's external debt is expected to increase significantly by GEL 6,187 million in 2020, largely due to the pandemic recession and the rapid pandemic response program. According to the International Monetary Fund, Georgia's external debt will reach 136% of GDP by the end of 2020 and will gradually begin to decline in the coming periods.
“The share of foreign currency liabilities in Georgia is almost one of the highest for almost all types of borrowers compared to selected countries, which is reflected in a significant increase in the external debt burden due to the depreciation of the exchange rate,” explains NBG.
Central Bank notes that a significant part of Georgia's foreign debt is borrowed from international financial institutions on preferential terms, which implies a low service burden on these types of loans compared to the market.
NBG forecasts that by 2020 the profitability of commercial banks will be close to zero. It says that before the pandemic banking sector was characterized by high profitability, in 2019, the average return on capital was within 18%. As a result of the pandemic, net profit became negative and amounted to minus 747 million in the first quarter of this year.
“Thanks to high operating income, it is expected that after the pandemic is over, banks will be able to restore a healthy level of profitability.” hopes the NBG noting that the anti-crisis economic measures taken to reduce the shock impact of Covid-19 have a somewhat positive effect on profitability, but the financial institutions do not accumulate excessive risk to make short-term profits.
According to the current forecast of the NBG, real GDP growth in Georgia in 2020 will be 5%, which is mainly due to declining net exports and investment. The bank noted that such economic forecasts are characterized by a high level of uncertainty and claims that the large-scale fiscal stimulus planned in partnership with international financial institutions will partially offset the effects of the severe shock, and contribute to rapid recovery of the economy in the post-crisis period.
The report read that the Georgian economy was still in the process of overcoming the negative consequences of the ban on flights from Russia in the summer of 2019 when a new challenge arose. The shock of the summer of 2019 and the subsequent 2020 pandemic significantly worsened Georgia's balance of payments.
The pandemic shock has increased risks in the real estate sector since the declining incomes and growing market uncertainty have significantly reduced demand for residential real estate. Also, the sharp decline in tourist flows has worsened the attractiveness of real estate as an investment asset, with an additional negative impact on declining demand, especially in tourist regions. Besides, it is important to note that before the current crisis, the supply of multi-apartment residential real estate increased, which in the current period, in the wake of a sharp decline in demand, increases the likelihood of realizing the risk of excess supply. As demand decreases and market uncertainty increases, real estate prices fall.
However, the report assures that the reduction in prices will not be as sharp as it was as a result of the 2008 crisis, because unlike the crisis the recession caused by the pandemic has made the real estate market more resilient.
The recovery of the sector largely depends on the remediation of the epidemiological situation, the depth, and duration of the recession caused by the pandemic. It is important to note that non-residents, who own one-third of mortgages in Batumi, are more likely to default than residents, especially when neighboring countries experience a pandemic-induced recession. “The imposition of a non-resident loan ratio of 70 percent by the National Bank last year reduces the risks to financial stability from the side of non-residents,” notes the report.
The next meeting of the Financial Stability Committee will be held on November 25th, 2020.
