TBC Capital published Weekly Update from the Chief Economist. The report reads, that the NBG hiked its policy rate by 50 basis points, contrary to the expectations of TBC Capital. While annual inflation is still expected to increase in December, it is only on the back of the low base effect a year ago.
“Last week, the NBG hiked its policy rate by 50 basis points, contrary to our expectations. While annual inflation is still expected to increase in December, it is only on the back of the low base effect a year ago. Furthermore, seasonally adjusted monthly annualized inflation is already showing a moderation, even below the 3% target level. Recent Lower oil prices and a stronger GEL are additional arguments supporting close to target outlook. Assuming Brent to recover to around 85 USD from its current 75, other key commodities to stay at around the same level, global supply chain constrains to ease at least somewhat, the GEL REER without domestic inflation to depreciate by around 5% and GDP to grow at 6% next year, the 2022 year end inflation should stand at around 3% target level.
Therefore, in the baseline scenario we see this hike rather temporary and are still betting on the cuts going forward with around 8.25% outlook by the end of the next year, keeping in mind that slower recovery in tourism inflows as well as materialization of the geopolitical risks in the region are drivers of the higher GEL rates, in our view.
As the record high interest rate differential widened further, to support the Larization initiative, the NBG, on its December 8th Financial Stability Committee meeting decided to introduce new approach to the calculation of banks’ currency induced credit risk buffer depending on the share of the GEL loans in the portfolio. Also, the maximum maturity for the FC loans was lowered from 15 to 10 years due to somewhat recovered FC housing finance. When seeking the right balance between the opportunities and risks, GEL/EUR/USD combination and adding RUB&TRY for large corporate exposures remains our favorite.
On the deposit side, as the GEL is broadly stable against the USD and post election depreciation expectations have eased, unlike previous months the switch to GEL deposits in November was observed. In fact, similar to the deposits, in November non-residents also switched back to the GEL as the share in local currency treasury securities holdings increased from 7.9 to 9.4%, or by around 80 million GEL m-o-m.
At the same time, despite switching to the GEL, strong estimated net inflows and the absence of FC selling interventions by the central bank, the NBG net reserves still declined. This was likely on the back of the government and/or SOE related FX conversions. Though, as expected, last week 2021 third quarter FDI print in the equity part was weak with only 16 million USD inflows”, - reads the report.
