On 10 April residents
of Georgia Georgia
Source:
საქართველო PayPal–ის სისტემაში
ჩაერთო (2013-04-10)
On 3 April the
International Monetary Fund published a series of documents regarding Georgia
The staff report, completed
on 1 March, was prepared after a visit to Tbilisi 11 December 2012 .
The letter of
intent, also dated 1 March, is signed by the prime minister, Bidzina
Ivanishvili, by the minister of finance, Nodar Khaduri, and by the governor of
the National Bank of Georgia (NBG), Giorgi Kadagidze.
Bidzina Ivanishvili
(ბიძინა ივანიშვილი) is a 57-year-old billionaire
Georgian businessman who in 1990 founded Rossiyskiy Kredit Bank (ОАО «Банк
Российский кредит»), in 1993 co-founded Impeksbank (ОАО «Импэксбанк»), and
in 1996 founded Cartu Bank (სს „ბანკი ქართუ"). As of 31 March 2013 Ivanishvili still retained
control of Rossiyskiy Kredit Bank through the limited-liability company
Promelektro (ООО «Производственно-энергетический альянс «Промэлектро»),
which owned 99.61497% of the bank’s stock.
According to the bank’s 2011 annual report, “No publicly available
financial statements are produced by the Bank’s parent company.”
In parliamentary
elections held in Georgia 1 October 2012 , Ivanishvili’s six-party
coalition “Georgian Dream” defeated the “United National Movement” party of
Georgian president Mikheil Saakashvili, and Ivanishvili was confirmed as prime
minister by the Georgian parliament on 25
October 2012 .
Bizina (“Boris”) Ivanishvili,
Prime Minister of Georgia
Below are
reproduced verbatim various sections of the staff report and the letter of
intent that most directly concern the banking system. (Emphasis as per original.)
Staff report:
INTRODUCTION
1.
Georgia has completed the first peaceful handover of power in its modern
history. The opposition six-party Georgian Dream coalition
won a convincing, and unexpected, victory in last October’s parliamentary
elections. Prime Minister Ivanishvili’s new government has taken office but its
cohabitation with President Saakashvili, who remains in power until next
October’s presidential elections, has posed challenges. Although macroeconomic
stability has been maintained, uncertainty has increased during the elections
and the resulting political transition. While financial markets have recovered,
FDI and credit growth have showed signs of weakening.
2. The new government plans to reinvigorate
economic reforms while pursuing more socially balanced policies. It
has expressed a strong commitment to transparency, accountability, and the rule
of law, already taking steps to strengthen the independence of the judiciary.
The government’s economic priority is to reduce unemployment and poverty,
which, despite strong growth over the last decade, remain relatively high, by
generating sustained and inclusive private sector-led growth. To this end, it
intends to improve the business environment, enhance social protection, better
protect workers’ rights, strengthen the country’s inadequate antimonopoly regulation,
and revamp the agricultural sector, which, on paper at least, represents about
half of total employment.
[...]
RECENT
DEVELOPMENTS
4.
Despite an election-related slowdown in the second half of the year, growth is expected
to have exceeded 6 percent in 2012 (Table 1). Real GDP grew by
7.5 percent in the first 3 quarters of 2012 driven by construction,
manufacturing, and the financial sector. However, growth started to decline
ahead of the October 1 election (averaging 6½ percent in August–September) and
then declined further (to -0.8 percent in October–December according to the
latest flash estimate). This decline appears to reflect a “wait-and-see”
attitude among investors, with FDI declining sharply in the third quarter and
credit slowing gradually (Figure 1).
5. Inflation has dropped well below the
National Bank of Georgia’s (NBG) 6 percent target, mainly because of lower food
prices and the lagged effects of real exchange rate appreciation. Headline
inflation has fallen sharply from almost 15 percent in May 2011 to -1.4 percent
at end-2012 (Figure 2). While a large part of this decline reflects falling
food prices (27 percent of the basket), exchange rate appreciation has also
reduced import prices more generally so that nonfood (or core) inflation has
also fallen to around zero.
[...]
11. Reacting to lower inflation and signs that the economy might
be slowing, the NBG has continued to ease monetary policy (Tables 4 and 5). It has gradually cut the policy rate from 8
percent in July 2011 to the current rate of 4.75 percent (although with a pause
last summer). Partly explained by the cuts in the policy rate, lari deposit
rates fell in 2012 by around 3 percentage points, while lari lending rates
remained high at more than 20 percent (Figure 2) so that spreads have increased.
In contrast, the spread between FX loan and deposit rates has fallen slightly
due to lower lending rates. Despite this, private credit growth has continued
to decline, and recently quite rapidly, from close to 30 percent (in
FX-adjusted terms) at end-2011 to 13 percent at end-2012 (Figure 5). High
dollarization (60 percent for deposits, around two-thirds for loans) remains a
substantial impediment to monetary policy transmission.
12. Although nonperforming loans have increased and profitability
has fallen, the banking sector reports comfortable levels of both capital and
liquidity (Table 6 and Figure 5). The capital adequacy
ratio, as defined by Basel I, stood at around 25 percent at end-2012, while liquid
assets cover 40 percent of liabilities maturing in the next 6 months (Table 6).
An increase in NPLs (NBG definition) in late 2012 reflects the NBG’s
forward-looking (and somewhat conservative) reassessment of borrowers’
repayment capacity after the election rather than more tangible developments.
According to the standard 90-day-overdue definition, NPLs remained broadly
stable at 4 percent. While lower than in 2011, banks’ returns on assets and on
equity remained positive in 2012, at 1 and 6 percent. Attracted by high FX
deposit rates, nonresident deposits continued to increase rapidly and now
amount to $700 million, or around 15 percent, of total deposits (up from 12
percent a year earlier). While financial soundness indicators remained strong
for the banking sector as a whole, two small banks have been close to the
minimum prudential requirements.
13. While economic performance has been generally positive, the
incoming government faces a number of challenges that need to be addressed. Despite the past record of rapid economic growth, unemployment, poverty and inequality all remain high so that
growth in the future needs to be more inclusive. The new government is
responding to this by increasing social expenditure, but these spending
increases will need to be reconciled with the need for further fiscal consolidation. The current
account deficit and external indebtedness also need to be reduced, but without
unduly sacrificing growth. The recent economic slowdown creates an additional complication,
particularly if it were to prove more protracted than expected.
[...]
C. Monetary and Exchange Rate
Policies
[...]
26. The NBG is taking steps to encourage de-dollarization. To encourage lending in lari, the NBG has recently relaxed
collateral standards for refinancing lari loans and is encouraging commercial
banks to issue long-term standardized lari CDs. The authorities are also
considering a scheme to encourage lari lending by placing long-term lari
government bonds at commercial banks (LOI, ¶29). Supervisory policies already
discourage FX funding and FX lending (including through additional risk
weighting for FX loans and higher reserve requirements for FX liabilities), but
these extra charges have so far proved insufficient to offset the large risk
premium that lari depositors require. Looking ahead, bank stress tests in 2013
that will require capital add-ons for FX lending risks, together with
introduction of a Liquidity Coverage Ratio (LCR) that will include higher
outflow rates for FX deposits in 2013, should further discourage use of foreign
currency in the banking system (LOI, ¶29).
D. Financial Sector Policies
27. The NBG is taking measures to contain non-core funding by
banks. While the NBG views noncore funding, including nonresident
deposits, as a potentially useful source of financing diversification for
banks, the steady increase in this funding, combined with its potentially
volatile nature, increases financial stability risks. The mission welcomed the
NBG’s new initiatives to contain nonresident deposits by increasing their
regulatory costs. In particular, the NBG has decided to adopt sooner (end-2013
versus 2015) the LCR framework, which assigns a higher outflow rate to nonresident
deposits. Moreover, starting in June 2013, banks whose nonresident deposits
represent more than 10 percent of total deposits will face a higher liquidity
requirement on nonresident deposits—this requirement will increase by one percentage point for each
additional percentage point over the 10 percent threshold (LOI, ¶34).
28. The NBG has further strengthened its supervisory framework and
is continuing preparing its transition towards Basel III and risk-based
supervision. The NBG completed its self-assessment
of its supervisory framework against Basel Core Principles in December 2012 and
agreed to submit it to staff for review, along with a document describing the
NBG’s updated approach to supervision, by March 2013. They are requesting an
FSAP to start by the end of 2013 (LOI, ¶35). From March 2013, banks will be expected
to comply with the standardized approach of Pillar 1 of Basel III. The NBG has
been assisting banks with their risk models and, in line with Pillar 2, banks
are expected to submit their first Internal Capital Adequacy Assessment Process
(ICAAP) forms in May 2013. The development of risk models for ICAAP, in
addition to allowing the NBG to better monitor different risks, will strengthen
bank risk analysis and should contribute to refining banks’ risk taking
behavior. To comply with Pillar 2 capital requirements, banks will perform
firm-level stress tests under macro scenarios (LOI, ¶31). Following Basel
recommendations, the NBG has developed a monitoring framework for domestic
systemically important banks, which will be used, together with micro-level stress
tests, to determine countercyclical supervisory measures (LOI, ¶32).
E. Structural Reforms to Boost Growth and Reduce Poverty
29. The authorities intend to implement a
far-reaching set of structural reforms to improve the business environment and boost
competitiveness (LOI, ¶37-38):
- Free Trade Agreement (FTA) with
EU. Georgia hopes to fulfill EU requirements and complete
negotiations (started at the end of 2011) in 2013. If successful, the FTA
should increase Georgia’s trade integration with EU and encourage foreign
direct investment.
[...]
RISKS
34.
Macroeconomic prospects are more uncertain than usual with risks skewed to the downside.
The mission emphasized that growth could be lower than expected if the
post-election slowdown persists, notably if investors remain cautious until the
government defines more clearly its economic strategy. Concerning external
risks, a slowdown in Euro Area growth could hurt Georgian exports, while a
shortfall in private capital inflows, especially FDI, could also adversely
affect external and financial stability. Nonresident deposits, and the
potential for crisis if they are rapidly withdrawn, remain another source of
vulnerability. On the upside, the authorities emphasized that the opening of
the Russian market to Georgian products could boost exports substantially, as
would the free trade agreement with the EU if negotiations are successful.
Also, if established early in 2013, the Rural and Agricultural Fund could boost
domestic demand in the second half of the year (but might worsen the current account
deficit in the short term).
35. Political risks are also a factor. Tensions
between the government and the president, if protracted, could dent investor
confidence in the new government’s ability to implement its policies. Conversely,
greater moves towards promoting the rule of law, economic freedom, and
transparency could promote growth in the long term.
[...]
STAFF APPRAISAL
[...]
43. Georgia’s financial sector appears
healthy, and the authorities’ efforts to continue to monitor and minimize risks
are welcome. The NBG has continued to strengthen its
supervisory framework and its efforts to transition towards risk-based
supervision are welcome. However, high financial dollarization is a source of
significant vulnerability, and reducing it will prove challenging. The NBG’s
attempts to limit the growth in banks’ noncore funding are welcome, and it will
be important to continue to monitor the isolated signs of possible risk that
may be present in one or two relatively small banks.
[...]
Letter of intent:
Tbilisi, March 1,
2013
Ms. Christine Lagarde
Managing Director
International Monetary Fund
Washington, D.C.
Dear Ms. Lagarde:
1. The convincing victory of our
Georgian Dream coalition in the October 2012 parliamentary election has given
our new government impetus to further advance Georgia’s political and economic
transformation based on transparency, accountability, and the rule of law. Free and fair conduct of the election and the peaceful handover of
power demonstrate Georgia’s progress toward a vibrant democracy. The newly
elected parliament has approved a new government, a new prime minister, and 19
other cabinet members. Throughout this momentous transition macroeconomic
stability has been maintained.
[...]
III.
MONETARY AND EXCHANGE RATE POLICIES
[...]
29. To accelerate de-dollarization and to strengthen the monetary
transmission mechanism, we will implement policies to encourage the use of the
lari in the financial system. The NBG has
relaxed collateral standards for refinancing loans and will encourage commercial
banks to issue long-term standardized lari CDs. We are also considering placing
longterm government deposits with commercial banks (in exchange for sale of
treasury bills to commercial banks) to promote long-term lari lending.
IV. FINANCIAL SECTOR
30. We are taking steps to further strengthen the financial sector
and to enhancing the regulatory environment:
- Competition in the banking industry
has intensified. However, our financial sector maintains comfortable buffers of
capital and liquidity. The capital adequacy ratio as defined by the BIS is around
24.6 percent (NBG definition: 16.5 percent); the BIS Tier I ratio is 18.8
percent (NBG definition: 13.2 percent). Liquid assets (excluding short-term
loans) cover 53 percent of client deposits and 33.7 percent of total
liabilities, while the liquidity ratio (NBG definition) stands at 40 percent.
These high capital and liquidity ratios mean that our banks have very low
levels of leverage, with a net loans-to-capital ratio of only 3.5.
- Given that there is very little
difference at present between the cost of funds and the cost of equity, we
believe that our conservative capital requirements do not impede efficiency; on
the contrary, they contribute to a lower cost of funds due to lower bank credit
risk. We are committed to ensuring that banks will continue to improve their
efficiency without compromising their financial soundness.
- We will encourage banks to develop
enhanced pricing models for their products. We have developed common guidelines
for the development of those models and have intensified profitability analysis
of the banks to identify profit and loss generating sources.
31. We will continue the
transition towards Basel III compliance and risk-based supervision. In 2013, banks should start to comply with the standardized
approach of Pillar 1 of Basel III. In line with the transition to Pillar 2,
banks are expected to submit their first Internal Capital Adequacy Assessment
Process (ICAAP) forms in 2013. Banks will also perform firm-level stress tests under
macro scenarios. These results will be used for Pillar 2 capital requirements.
We have initiated programs to help financial sector firms make this transition,
especially regarding ICAAP, while some banks are receiving assistance from
external consultants to smooth the process.
32.
In line with Basel III, we are monitoring the need for additional
countercyclical measures, vis-à-vis our old, more rigid methodology of changing
the risk weighting for FX assets in the capital adequacy ratio; which, given
the high dollarization of the banking system, has been quite an effective
regulatory tool. We have developed the framework for monitoring domestic
systemically important banks (D-SIBs), in line with recent Basel
recommendations. This framework, together with the development of micro-level
stress tests, will gradually replace the current, less fine-tuned approach.
33.
Starting from 2012, the NBG has made efforts to make the liquidity coverage
ratio (LCR) the core liquidity ratio for banking supervision. We
are currently calibrating our use of the LCR. Currently we use the LCR as a
monitoring tool; after some further fine-tuning, we aim to adopt it by
end-2013, well ahead of Basel III’s 2015 deadline. Within our LCR, we already
include higher liquidity requirements for nonresident deposits compared with
resident deposits. Going beyond Basel recommendations, our LCR also accounts
for such characteristics as: withdrawable vs. nonwithdrawable deposits, parent
financing vs. private financing, concentration, and loan quality.
34.
While in the past we have relied mainly on moral suasion, we are now taking a
more formal approach to discouraging nonresident deposits. By
June 2013, we will introduce a transitory liquidity ratio for nonresident
deposits, which will take effect until the full LCR comes into force. Provided
nonresident deposits are no more than 10 percent of total deposits (in which
case we believe they can be a useful source of diversified funding), they will
face the standard 30 percent liquidity requirement. For each percentage point
above the 10 percent threshold, the liquidity requirement for nonresident
deposits will increase by the same amount. Thus if nonresident deposits make up
15 percent of total deposits, then total nonresident deposits will face a
liquidity requirement of 35 percent. At the same time, the NBG will continue to
work on distinguishing nonresident depositors with no interest in the country
from non-residents who have close economic links to Georgia (employees of
international organizations and embassies, diaspora, foreign companies with
business relations in Georgia, etc.). While hard to calculate precisely, our
current estimates suggest the share of NRDs of people with no other interests
in the country is less than half of total reported NRDs. This will help us
refine our supervisory measures.
35.
After upgrading the NBG’s supervisory structure and approach, we completed a
selfassessment of our regulatory framework against Basel Core Principles. To
complement our selfassessment we have developed General Risk Assessment Program
(GRAPE), a document which describes our approach to supervision. We aim to send
GRAPE and our self-assessment documents to the IMF for review by March 2013.
These would be important inputs for an FSAP, which we request from the Fund and
which we hope will be launched by the end of 2013.
36. We are continuing our attempts to
further de-dollarize the banking system. Our existing policies,
including additional risk weighting for FX loans, higher reserve requirements
for FX liabilities, and overall higher negative liquidity carry for FX
liabilities already discourage FX funding and FX lending. Our micro-level
stress testing framework (to be performed by banks in 2013) will also take into
account currency-induced credit risk. Furthermore, to address the macro-level implications
of dollarization, in our new framework we will impose a capital add-on for FX
lending on top of the amounts indicated by the micro stress tests. We will do
this gradually in 2013–14. The use of higher-than-required run-off rates for FX
deposits, once our LCR framework takes effect, should also help discourage the
use of foreign currency.
[...]
Sincerely
yours,
Bidzina
Ivanishvili
Prime
Minister of Georgia
Nodar
Khaduri
Minister
of Finance of Georgia
Giorgi
Kadagidze
Governor of the National Bank of Georgia
Sources:
Georgia: Letter
of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding (2013-04-03)
Official
biography of Bidzina Ivanishvili: საქართველოს პრემიერ-მინისტრი
Ivanishvili’s
effective control of Rossiyskiy Kredit Bank through Promelektro as of end-2011: JSC Rossiyskiy Kredit
Bank: Consolidated Financial Statements for the year ended 31 December 2011
(2012-07-04)
Shareholders of Rossiyskiy Kredit Bank as of 31 March 2013 : Список аффилированных лиц
ОАО «Банк Российский кредит» по состоянию на 31 марта 2013 года
(2013-04-01)
Mark Pleas
[contact]
