Moody’s praises Georgia’s plan to ease loan obligations for citizens

Global rating agency Moody’s is praising Georgia's plan to ease the loan obligations for citizens who have bank loans in United States (US) dollar by offering them to convert their dollar-dominated mortgage loans into the Georgian Lari (GEL).

Georgia's plan to convert dollar-denominated mortgage loans into the local currency is credit positive for banks,” said Moody’s in its latest report published yesterday.

The Government of Georgia, together with the National Bank of Georgia (NBG), took steps to halt the devaluation of the GEL against the greenback and to boost the country’s economy. 

To note, historically the Georgian Lari reached an all-time high of 2.58 earlier this month and a record low of 1.23 in December 1995.

The Government’s effort meant Georgian citizens who took a loan in US dollar before January 1, 2015 could convert their loan into Lari. Loan conversion is voluntary and will start from January 1, 2017 and mature in two months’ time.

Furthermore, from January 1, 2017 banks will be obliged to issue loans worth up to 100,000 GEL only in the national currency, while from 2018 the change would expand to loans up to 200,000 GEL.

The purpose of this program was to ease increased debt services burden, caused by exchange rate fluctuations. According to existing estimates, loans issued before January 1, 2015 were affected the most. The program will not cover loans that were issued after the significant exchange rate changes, said NBG.

If you want to read more about the Program of Conversion of Loans click here.

These and other steps made by the Government of Georgia were praised by Moody's rating agency, which said the 'Program of Conversion of Loans' did not envisage expenses by the banks as the 0.2 GEL difference would be covered by the Government.

The program will refer to up to five percent of cases, reported Moody’s.

The banks in Georgia are facing increasing credit risk as the exchange rate fluctuation influences negatively on the consumers capacity to pay loans. Up to two thirds of the credits in Georgia are denominated in a foreign currency (mainly USD),” said Moody’s.

Up to 40 percent of loans in Georgia were given to consumers in US dollar, despite them not having their income in the same currency, said the ratings agency report.

How much did banks lend in Georgia?

Commercial banks in Georgia lent 16.9 billion GEL in October 2016, which was 447.4 million GEL or 2.7 percent more compared to September 2016, showed latest data by NBG. 

Month-on-month figures showed loans taken out in the Georgian national currency increased by 110 million GEL (1.8 percent) while the sum of loans in foreign currencies decreased by 337.4 million GEL (3.2 percent).

The Government of Georgia also admitted a high dolarisation rate in the loan portfolio was the most acute problem currently facing people in Georgia. A high dolarisation was when the percentage of loans in US dollar in the total volume of foreign currency denominated loans was high, and the main reason for dollarisation was because of greater stability in the value of the foreign currency over the domestic currency.

Taking into account this challenge, the Government started working on a Joint Action Plan to stimulate a de-dollarisation process in the country.