According to the TBC Research, GEL remains undervalued, still being a concern for NBG.
The rate hikes in GEL and lower reserve requirements to stimulate FX credit coupled with depreciation expectations have resulted in a further increase of banks’ liquidity in FX and higher GEL deposit rates. Including the expectations channel, these moves likely helped stabilize the GEL, which remains broadly unchanged.
However, the desired appreciation has not yet been evident. As expected, inflation has risen further, reaching 6.9% in October. While most of the pass-through appears to have already materialized, some lagged effects are still expected when combined with the low base effect in December.
As per the latest NBG projections, annual inflation will remain elevated until March 2020 and thereafter will start to decelerate, undershooting the target by the end of 2020. According to our estimates, at approximately the same level of commodity prices and with GDP growth of around 4%, inflation to reach around 2% by the end of 2020, the GEL REER, excluding domestic inflation, should appreciate by roughly 5% from its current level.
The somewhat stronger EUR against the USD, and approximately stable USD/RUB and USD/TRY exchange rates, should mean even more appreciation of the GEL against the USD. In our view, the recent tightening has been substantial and its effects have already started to appear in October’s preliminary data.
Some shift in sentiments relative to the previous months is notable, with FX credit and GEL deposits increasing at higher rates. Furthermore, coupled with still favorable international financing conditions, as reflected by the 10-year US Treasury note yield and greater appetite worldwide for risky assets, much higher GEL rates also appear to work in the GEL treasury securities market.
“This is evident from the increased number of GEL treasury securities held by non-residents. Nevertheless, we still expect the NBG continuing its tightening cycle and, together with the possible use of other tools, to increase the policy rate by 50 basis points during its 11 December MPC meeting, in a way in form of the insurance hike”, the documents reads.
