Change in the Borrowing Patterns of the Georgian Private Sector

In the past few years several major regulations were implemented both by the government and the National Bank of Georgia. Including but not limited to, a bill passed in January 2017 outlawing the issuing of loans below (the equivalent of) 100 thousand GEL in foreign currencies to individuals (the first phase of Larization), stricter collateral requirements in May 2018 (first phase of lending regulations), borrower’s income analysis requirement (second phase of lending regulations) and increase in the minimum threshold of lending in foreign currencies to 200 thousand GEL, this time including both individuals and legal entities. The latter has been recently criticized and seen as an obstacle by the private sector. Thus, authorities have been considering loosening some of the abovementioned requirements. Until the suggested easing takes effect, it is important to determine the implications that the regulations might have had on private sector borrowing patterns. In this newsletter, possible implications of imposed lending constraints on the private sector are presented.

The steady growth of loans issued in foreign currency (i.e. increasing dollarization) has been an acute issue in the past few years. In spite of a lari-denominated debt growing significantly faster as a result of the first phase of larization, the granting of dollar- and euro- denominated foreign loans have accelerated since the third quarter of 2017, especially in the last quarter of 2018. (See graph 1, where currency exchange effect is excluded) The main driver of the above mentioned loans, issued in nondomestic currencies are legal entities as they hold approximately 86.5% of debt denominated in foreign currencies. As depicted in the second graph, contrary to the expectations that the limit of 200 000 GEL issued in foreign currencies was going to hinder private sector borrowing, the percentage of loans issued in foreign currencies (both USD and EUR) by legal entities (with fixed USD/GEL value) has been relatively stable since 2019. Possible explanation could be the volume of issued loans: only 12.6% of large corporate loans were under 100 000 USD (297.5 thousand Lari), while for SMEs, it was 29% (see graph 3).

Far more interesting is the fact that since the implementation of the aforementioned regulations in January 2019, the flow of loans in US dollars issued to private sector has abruptly dropped without affecting the rate of loans in foreign currencies. Instead of borrowing more in lari, companies resorted to the euro as an alternative. Since 2017, both SMEs and large corporations have increased borrowing in euros fivefold. Interestingly, on average, interest rates on loans in euros have been 2% lower compared to those in USD. Simultaneously, since February 2018 the euro has depreciated by 12% against the US dollar (but still managed to appreciate 7.6% against the lari). The relatively low real interest rate of the euro makes it especially lucrative for Georgian businesses, who are trapped between the high interest rate of the lari and the constantly appreciating US dollar. The advent of the euro as a transitional currency (see graph 4) explains why companies have not decreased borrowing in foreign currencies since January 2019 (see graph 2). The same graph also indicates why borrowing in foreign currencies decreased before the limitations were set in place. The expectation of further depreciation could have discouraged companies from taking risky (USD- and EUR- denominated) loans.

In conclusion, the private sector seems to have easily avoided the 200 000 GEL threshold and in times of high depreciation resorted to the euro as an alternative. If the high dollarization in the private sector is a matter of concern it should be addressed with an effective response from the authorities. If it is not, the implementation of such regulations is made redundant.

By GIORGI KHISHTOVANI, RESEARCH DIRECTOR AT PMC RESEARCH CENTER; LEVAN MIKELADZE, RESEARCH ASSISTANT AT PMC RESEARCH CENTER