The consequences of Bloomberg for Georgia

Nino Arveladze

There were frequent discussions among experts concerning considerable imperfections of Tbilisi interbank monetary exchange and the role of National Bank of Georgia in regulating national currency exchange rate.

By the recommendation of International Monetary Fund and initiative of National Bank of Georgia Bloomberg Trading System has been adopted in Georgia. However, these changes caused dissatisfaction of the clients. Some questions appear about what exchange rate of national currency should be expected by Georgian business society and population and how national bank will intervene in currency trading. International Monetary Fund was claiming that free market principles were restrained with interventions made by national bank at the market. However, National Bank of Georgia remains one of the big players. It maintains the levers of defining national currency exchange rate. It should be noted that major clients might be put to a disadvantage. At a glance, under the conditions of economic activity deceleration, National Bank of Georgia got rid of a headache. Mr. Davit Kiguradze, the head of TBC Bank treasury department is speaking about novelties:
E.G. – Mr. Davit, Tbilisi Interbank Monetary Exchange has been abolished. Please tell, why it became necessary to abolish the exchange and what were the main imperfections of the exchange?
D.K.- Trading system was outdated. Therefore, it had some problems. However, this was not the main reason of exchange abolishment. Determining factor of this was unacceptable rules of trading. Currencies are traded with different principles in developed countries, but in Georgia all the banks were participating in the trading and National Bank had to make interventions frequently in order to balance exchange rate. Developing countries with transition economies like Georgia are working with this system as their currency is bound to dollar and such type of trading becomes necessary. In other words, trading was carried out only once a day at a specific time, when all the banks submitted bids for buying or selling foreign currency, as a result every bid was complied. This rule is not approved at developed markets. Freely converted currencies like Euro, Dollar, Swiss Franc, English Pound Sterling and other basic currencies are traded at open market, where operations are made 24 hours a day without any limits in volume. Such trading system is flexible and liquid. Every interested party may participate in trading.
E.G. – You mentioned new system that is implemented in Georgia; please explain some features of this system.
D.K. – With the recommendation of National Bank of Georgia, banks adopted Bloomberg electronic trading system that enables them to make GEL-USD currencies and monetary-crediting operations. Bloomberg is not only a trading system; this is information base with all types of information gathered there – such as political, economical, sports etc. Various analyses and forecasts are published. Moreover, one might trade with various foreign currencies, bonds, indices and other products. Bloomberg is broad system. In the nearest future, the diapason of Georgian banking system that is represented by GEL-USD trading only, will broaden and cover trading with interbank deposits. Such trading is actively made by several banks. National Bank is intending to implement trading with deposit certificates in the mentioned system. The final aim is the transfer of every interbank operation into electronic trading system.
E.G. – You mentioned securities, how far is stock market developed in Georgia and is its activation expected in the nearest future?
D.K. – Stock market is quite limited in Georgia. The volume and number of operations made is quite scanty. The market is not developed in the country. However it is not excluded that new electronic trading system and additional encouraging circumstances become stimulating factors for it. Operations at Bloomberg new system are more transparent. Bloomberg is an international trading platform and it is available for any interested party. They can observe processes and thus investors might be more interested. However, it is unknown when this stage starts. Now we have interbank operations – such as monetary operations, depositing and crediting, in the future there might be buying and selling of securities, purchasing treasury obligations at initial market and their realization at secondary market. Today, National Bank is having GEL-USD swaps and spot foreign exchange rate auctions. The spectrum might be broadened in the future. This depends on National Bank at some level as it was the initiator of adopting the new system. We welcome this new system as the processes might be handled easily, transparently, flexibly and safely. Bloomberg is quite convenient platform. Previous system was serving monetary operations only and had limited abilities as only spot valuation of currencies was available or the operation was done day+ 1 valuation. Now it is possible to make multiple operations.
E.G. – How might this change influence the GEL exchange rate? National Bank of Georgia was playing major role in defining exchange rate and it is interesting what levers are left for regulations?
D.K. – National Bank is selling USD by auctions at interbank market. Today National Bank is not making interventions to regulate demand-supply. However, this alternative method (auction) consists in the National Bank’s mean to sell necessary volume of Dollar that is defined by the existing situation of the market. By means of mentioned instrument, National Bank relieves the stress and the panic that might appear in case of high demand on USD. By supplying USD National Bank is considerably decreasing excess demand. Consequently, National Bank is holding levers of regulating exchange rate, not by participating at interbank exchange, but by selling USD at auctions. Not only National Bank of Georgia, but also Central Banks of any country. However, the ways and rules are different, as their markets compared to ours are quite different and big.
E.G. – How far it might be justified to make such a significant changes under the conditions of world financial and economic crisis?
D.K. – We held meetings with our clients concerning this issue, as it is necessary to give them more information. Actually, there are no dangers in adopting Bloomberg trading system. Fluctuations in exchange rate depend on demand-supply at the market. Exchange rate fluctuations were presented at interbank monetary exchange and the situation will be the same in case of Bloomberg also.
E.G. – Was interbank monetary exchange bearing a real-world function or its existing was fictitious?
D.K. – Of course, interbank exchange was bearing a real-world function as GEL-USD conversion operations were made with its trading sessions. Another aspect is how well were these operations organized at the trading sessions. There were cases when exchange rate was set on the basis of demand-supply of currency by banks, but there were cases when banks were unable to balance desired exchange rate due to big volumes. In this case National Bank’s intervention was needed, as it was the biggest player and remains as such up to now. In new trading system, at auctions held by National Bank, any bank desiring to purchase USD names the figures at its own discretion. Prevails the one who names the highest price and then if National Bank still has the money to sell, other bids are satisfied also by decreasing exchange rate.
E.G. – In what situation might the big clients find themselves under the conditions of new system, when they make a bid at auction and won’t get desirable results?
D.K.- In old system of Tbilisi interbank monetary exchange, bids were gathered till 11 o’clock in the morning and then we were placing them at the exchange. In much the same way, now we are offering clients to make bids for participating at Bloomberg exchange, where they name the price and desirable volume of currency they want to buy or sell. In this case we are the mediators and we are placing client’s bids at exchange for conversion. For this aim, we enter exchange and look for relevant contractor, bank that wants to make needed contra operation, and thus we satisfy client’s demand.
E.G. – If desirable bank won’t appear then the client might face serious risk and not carry out needed operation that will be disadvantageous for it.
D.K.- In case of Tbilisi interbank exchange client’s demand was always satisfied by National Bank, the exchange rate was set and conversion was always made for the clients. In case of Bloomberg, this might not happen, if interested party in demanded exchange rate doesn’t appear. Client has the right either to wait for the next trading session or to convert the sum at the special rate offered by the bank. In a word, if client’s bid is not satisfied, it can wait for the next auction, or accept the offered price and pay a bit more. These rules are operating at any developed market. In case of trading EUR-USD, we can operate by the exchange rate that is set for this moment at the market, or wait for desirable offer. In case if desirable exchange rate is not set until appointed time, the bid is abolished and conversion is not made. In contrast to us, foreign monetary markets are more developed and allow more currency operations. Foreign monetary market is huge and there is not problem in volume. Moreover, foreign exchange is working 24 hours a day and every country and bank are participating in trading of main currencies (Euro, Dollar, Franc, etc). When working hours are over here, trading continues till morning there except weekends.
E.G. – How frequently will the auctions be held?
D.K. – Auctions will be held twice a week. On the day of auction, in order to sort out the situation National Bank is inquiring and contacting commercial banks to find out the volume of demanded USD.
E.G. – It appears that clients are facing some risk. What are the benefits of a new system for the client?
D.K.- Old system was more limited; bids were accepted only till 11 o’clock. Now it’s possible to make a bid till 4-5 o’clock as the exchange is not so active. Client may define the amount of sum to be bought. In case of failure to satisfy the bid, client is able to withdraw a bid. The old system wasn’t allowing this, as after the bid making was over and exchange rate was set, client was obliged to make operation at fixed exchange rate. Now they have right to choose, if rate increases they can terminate the operation. In case if rate increases by two Tertis and it’s necessary to convert the sum, client’s losses are quite heavy. New system enables to operate at exchange more effectively and it is more flexible. To my mind, implementation of a new system is a reasonable act and this encourages market development.
E.G. – What was the role of International Monetary Fund in replacement of the system?
D.K.- International Monetary Fund was the main initiator of these changes as it was against National Bank’s active interventions that were contradicting with free market principles.
Despite the fact that clients were used to old system and changes caused definite dissatisfaction among them, these changes were inevitable sooner or later. The volume of trading was quite decreased and there was no necessity of National Bank’s interventions. This is not a big change. Simply, monetary trading should be done without additional levers and there should be more freedom in operations. This is not an attempt of International Monetary Fund to restrain National Bank of Georgia. Banks’ monetary operations might become complicated as instead of one operation they will have to make several operations, but new system allows constructing of healthy conversion scheme. Under the conditions of new system, there were frequent cases when our bank wanted to purchase currency and it couldn’t manage this or on contrary, we do not wanted to make some operations, but we were obliged to do so.
E.G. – What are the changes in commission charges in a new system?
D.K. – We (TBC Bank) have no changes in commission charges. We were paying commission charges directly to exchange and we were charging clients defined commission. The fee is the same, if the conversion operation takes place at the auction we are receiving service fee. In case if client refuses to make operation he is not paying a fine. First, clients were confused by the change of the system. I do not know what the decision was made by other banks concerning commission charges.
E.G. – How new system might influence exchange offices? Should we expect new stage of fall in exchange?
D.K. – I cannot exclude some changes concerning exchange offices. The margin between selling and buying price might slightly increase as the new system implies some changes here – National Bank is not a warranty of conversion any more. In order to balance liquidity of the market commercial banks are frequently buying money from exchange offices. Considerable changes are not expected in this direction.
If there were no auctions held by National Bank, then GEL exchange rate would be higher as our country is importer and we have quite sharp disbalance in trading as import is three – four times more than export. Besides this, the flow of foreign currency is decreased especially since August war. This increases the odds in demand-supply of Dollar. On the other hand, the volume of imported goods reduced in I and II quarters of 2009, especially this might be said about luxurious goods. There always will be demand on dollar in an importer country like Georgia. However, due to low economic activity considerable fluctuations in GEL exchange rate is not expected. During past two-three years, under conditions of high economic activity, big volume of sum was flowing as investments and money transfers. This volume of foreign currency was sold at Tbilisi interbank monetary exchange. This was a defining factor for hard national currency. Today, the picture has changed, demand on USD is exceeding supply and only National Bank of Georgia is able to maintain stable GEL exchange rate. It will have to sell USD at auctions in order to avoid sharp fluctuation of GEL exchange rate.
At present time, reserves of National Bank are filled with foreign grants and aids. Current reserves of the National Bank equal to the volume of reserves in April of last year. Therefore, sharp devaluation of GEL is not expected till the end of this year.
E.G. – What are the consequences of crisis for TBC Bank? Experts are forecasting the peak of crisis in September, how is your bank preparing for this?
D.K. – Crisis had its impact on the bank. There are many bad loans. This might be said about big corporate clients, especially in construction business. There are some problems with the credit portfolio of those companies which were trading luxurious things. At this stage, major part of the credits is reserved and thus the situation is stable more or less. Big losses are not expected in the future. However the process continues, supposedly even more debts will be written off and some reserves will be created. However, this won’t exceed the volume that we had at the beginning of the year. There are no sales at real estate market and thus there is a grave situation. Companies working on retail sales and trading with essential commodities are in better situation. However, sales are decreased even in retail sales. We are expecting negative results from real estate, construction companies and those which are trading luxurious goods. The situation might become complicated in other sectors of economy. I hope there will be some improvement at the end of this year.
It’s obvious that the changes were essential at Tbilisi interbank monetary exchange. However, it’s doubtless that National Bank of Georgia remains a big player and maintains decisive positions in defining exchange rate of national currency.