TBC Capital published a report from Chief Economist. According to the document, Last week, the GEL weakened again mainly due to the market participants bet on the GEL seasonality. Once again, if almost everyone expects the GEL to weaken in Q4, the larisation in credit and dollarisation in deposits should already be evident.
As of the report in fact, that was the dynamic based on July data, which in this regard, most likely, is a good proxy for August as well. This view is also supported when looking at the August preliminary data of the FC deposits growth in excess of the GEL deposits growth. As a result, the banking system liquidity in FC, often being strongly correlated with the GEL, increased substantially.
"What's next? Such a high FC liquidity has to moderate implying an additional supply of the USD to the FX market once the depreciation expectations diminish. This should work both, on credit as well as on the deposit side where despite higher USD rates internationally, we expect local USD deposit rates to further decline from already record low levels leading to a stronger USD funded domestic demand. Therefore, we are now more confident that the GEL seasonality looks to be already priced in and TBC Capital year end projection of USD/GEL at around 2.80 still looks to large extent reasonable. From our 3 pillars, we assume net inflows to remain strong, now with expectations of at least some change in sentiments as described above. On the GEL REER side, despite recent USD strengthening, our broadly probably neutral, or possible lately somewhat GEL supportive stance has not changed, while we remain the GEL bearish from the inflation outlook perspective",- the report reads.
