Helping Georgian banks to push back against a dollarised economy

Georgia has benefited from a growing economy, strong international trade ties and a reputation for being business-friendly. While the economy has overcome a number of shocks over the past 20 years, the country's financial services sector has faced the persistent problem of a high degree of dollarisation - use of the US dollar as a substitute for the lari, the national currency.

A dollarised financial system can expose developing economies, and individual companies within them, to significant currency risks when mismatches arise between assets in local currency and liabilities in US dollars - hence efforts by the National Bank of Georgia, the country’s central bank, to reduce the level of dollarisation.

The dollarisation phenomenon is common to many frontier and emerging markets, but in the case of Georgia, high levels of inflation have exacerbated the impact on the local economy, with depreciation of the currency creating debt service problems for institutions that borrow in dollars and lend in lari. A side-effect has been to push local currency interest rates higher.

Supporting the uptake of local currency activity

De-dollarising its economy should improve Georgia's financial stability and contribute to the development of its domestic capital markets. FMO is one of a number of supranational institutions that have provided an important source of GEL-denominated funding for domestic financial organisations.

We have been working with Bank of Georgia, one of the country's two dominant commercial banks, in a relationship stretching back to 2011. Over this period the bank has expanded its operations both within the domestic market and internationally, and has become an important provider of financial and banking services to both private and corporate clients.

In August 2018 FMO issued a GEL160 million ($65 million) loan to Bank of Georgia, raised via a lari-denominated bond listed on the Georgian Stock Exchange, the first by FMO of a GEL bond and our largest local currency bond to date.

The funding programme will protect Bank of Georgia by helping to finance its local currency lending business, reducing the risk of currency mismatches in the bank’s balance sheet. It will also help Bank of Georgia comply with the de-dollarisation measures instituted by the National Bank of Georgia, requiring institutions to increase their levels of lari-based lending to both retail and business customers. 

This transaction was followed in October by a five-year loan facility of GEL103 million ($40 million) to TBC Bank, with which FMO has been in partnership since 2006. The facility, also funded by a placement of bonds on the Tblisi exchange, will primarily help finance young entrepreneurs running micro, small and medium-sized enterprises in Georgia, as well as mortgage loans for retail customers.

The importance of local currency bonds

In the past FMO has provided loans to both Bank of Georgia and TBC Bank with currency risk hedged by Amsterdam-based Currency Exchange Fund (TCX), which was initiated by FMO in 2007. TCX manages currency risks by pooling non-correlated frontier and emerging markets currencies, despite often challenging market conditions, and since 2016 it has been working closely with FMO to develop a market for local currency bonds that can feed into a growing supply of local currency lending.

Last year's issue of local-currency bonds by FMO also introduce AAA-rated bonds to the GEL fixed-interest market, which historically has been dominated by government issues. The bonds will also be available as a pledge for repo transactions with the central bank.

Local currency bonds can tap both local savings and offshore investment, playing a critical role in the practical de-dollarisation of economies. We see growing appetite from investors for this type of bond, leading to larger deal sizes.

FMO's aim is to help make Georgia’s local currency economy more stable, robust and, ultimately, more dynamic. GEL-denominated loans funded by bonds of this kind help FMO to protect clients in emerging and frontier markets from the most damaging consequences of fluctuation in the exchange rate with the US dollar, particularly sudden depreciation, which can disrupt and delay vital economic activity. The confidence shown by the FMO bond also represents a signal to help attract other outside investors to Georgia.