Monica Ellena in Tbilisi -
A controversial bill stripping Georgia’s central bank of its financial supervision functions and transferring them to a separate agency is raising concerns among investors over the independence of the country's financial regulators.
President Giorgi Margvelashvili has indicated that he will veto the bill, which was approved by parliament on July 17, but the ruling Georgia Dream coalition is well placed to override it as it holds a comfortable majority of 86 seats in the legislative body. Only 76 votes are needed to overturn a presidential veto.
According to the bill, the planned Financial Supervisory Agency (FSA) will be governed by a seven-member board. The National Bank of Georgia (NBG) governor and one more member of the central bank’s board will take two seats; five other seats will be occupied by candidates nominated by the government and confirmed by the parliament, which will also endorse the governor indicated by the board members.
On June 24 in a joint letter to Prime Minister Irakli Garibashvili and Parliamentary Speaker Davit Usupashvili, the International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), and the World Bank have called for keeping banking supervision inside the central bank.
According to the IFIs, the amended regulation “would weaken the independence and quality of banking supervision in Georgia, threaten banking sector stability, and undermine prospects for sustained growth”. They said their concerns are heightened “by the hasty manner in which the new draft [was] tabled, without consultations of key stakeholders or outside experts”.
“In 2015-2016, Georgian banks may need to raise capital to strengthen their balance sheets,” the letter reads. “Uncertainty created by legislative changes and upheaval of banking supervision could jeopardise investors’ trust and thus complicate this task. Banks would then have to deleverage, which would hurt credit and growth.”
Usupashvili said on July 16 that the new regulation had been amended and put in line with the IFIs’ recommendations. However the key principle of removing banking supervision from the NBG remained unchanged.
“It looks a strange decision as the central bank seems to be highly competent,” London-based financial analyst Bruce Packard told bne IntelliNews. “It did not succumb to pressure ahead of the financial crisis to let banks reduce the equity funding of their balance sheets, something that is now being widely adopted by regulators such as the Bank of England.”
Packard, who was part of the team who in 2012 advised Bank of Georgia ahead of its listing on the London Stock Exchange, adds that “given the stresses the Georgian banks faced in 2008, and how they came through such an extreme crisis with depositors confidence still intact, it looks like the NBG would be best placed to keep supervising the banks”.
Critics of the bill, including the country’s business associations, claim it is politically, rather than economically-motivated, as one of the initiator, Georgia Dream deputy Tamaz Mechiauri, chairman of the parliamentary committee for finance and the budget, stated that the central bank’s board members “do not reflect at all interests of those forces which are currently in power”.
Current governor Giorgi Kadagidze, whose seven-year mandate expires in February 2016, is the last high-ranking representative appointed by the previous government under then President Mikheil Saakashvili. Prime Minister Irakli Garibashvili has rejected the criticism, stating that “[the government’s] goal is not to politicise the National Bank of Georgia, on the contrary, our goal is to depoliticise it".
Weak lari, strong banks
The central bank has been blamed for the sharp devaluation of the national currency, the lari, resulting from the strengthening of the dollar and the decline of external earnings, namely through reduced exports and remittances.
Kadagidze opted for safeguarding the NBG’s reserves rather than using them up fighting to maintain the lari’s value – a policy supported by the IMF.
“Experience [in other countries] shows that any central bank going against market fundamentals is not going to end well,” he explained to bne IntelliNews in an interview in April. “Spending reserves to cover up the fundamental shortages will not help at all – it would only postpone the problem.”
The lari was mostly stable for about a month till mid-July, hovering around 2.25 per greenback, about 28% weaker than in November 2014, when the devaluation started. Packard argues that “no expert of modern financial ecosystem would blame the central bank for the weakness in the lari”.
While the lari showed weakness, the banking sector re-affirmed itself as the country’s success story. Bruno Balvanera, EBRD’s representative for the Caucasus, labelled Georgia’s banking system “a jewel,” and said its financial system was ready to move onto a new level with more sophisticated capital markets.
As of July 1, 20 commercial banks operate in Georgia, including 16 foreign-controlled banks and two branches of non-resident banks. The five banks with the largest assets constituted about 77% of the total share of assets in the banking sector. The two main players, TBC Bank and Bank of Georgia, are both listed on the London Stock Exchange and accounted for about 57% of total assets.
“The system is safe and stable,” maintains London-based David Nangle, head of equity research at Renaissance Capital “although we are looking at a GDP slowdown and asset quality deterioration evolution as a result of the depreciating lari. That will affect banks’ growth and their profitability, but not their stability”.
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