Page 44 - GEORptDec21

VTB Capital presents three new scenarios for Georgia’s national bank based on new rate projections
VTB Capital has explored three new possible scenarios for the National Bank of Georgia’s (NBG) policy rate – an expected 10.3% in Q1 2022, dropping gradually to 7.1% in Q3 2023, but with 310bp of possible hikes in 2022 as an alternate scenario – in a new research note on November 22.
In the first scenario, VTB advises that the NBG’s guidance might mean nothing at all ("guidance as irrelevance"). In this case, the NBG’s guidance – updated only once per quarter and in an extremely uncertain environment – is reflective of nothing significant. VTB notes that despite the NBG publishing its trajectory for the past five years, a lack of market surveys over that time means there is no data on expectations against which to gauge the accuracy of the bank’s moves. The same is even truer for inflation expectations, which the NBG has only just begun tracking itself. With so little data to go on, there could be little value in the new NBG guidance.
The second scenario posits that the prediction of nominal rates is important in forming financial conditions in the country ("guidance as strategy"). In bank-dominated financial systems like Georgia, forward guidance is important for banks to understand the environment and plan their transfer curves, something that VTB notes seems important as the NBG appears worried about lending. In this case, the NBG’s "scare of higher rates" it is seemingly communicating to Georgia’s banks could drive the latter’s behaviour, although this policy’s effectiveness is uncertain given the lack of data able to support the credibility of the rate scare. VTB notes, however, that the existence of easier methods to communicate the NBG’s wishes to banks might mean that this apparent scenario is simply overthinking matters.
The final scenario entails the rate predictions indicating nothing more than a path-dependent outcome of the NBG’s routines decided upon years ago ("guidance as routine"). This would imply that the NBG providing the 310 bps hike alternate scenario means nothing more than signalling to politicians one potential dangerous situation the bank wants to avoid, while also simply sharing a broader range of data with the market. The extreme unpredictably the central bank experienced over the past two years of the pandemic further calls into question the reliability of any numbers the NBG might provide, meaning that even the bank’s sharply divergent alternate scenario is simply a reflection of highly imperfect data.
44 GEORGIA Country Report December 2021 www.intellinews.com