Page 30 - bne IntelliNews George country report Sept 2017

Financial sector distress has manifested itself across the region in many ways. Since mid-2014, the decline in commodity prices and a slowdown in key trading partners’ growth have made it more difficult for borrowers to service their debt. This has been especially true for foreign currency loans where currency depreciation has also added to the debt-servicing cost.
Consequently, overdue loans have increased, eroding the reserves banks set aside for difficult times. This has reduced their capital further—with many already undercapitalised by international standards. In addition, limited supervisory independence has, in some cases, impeded the resolution of deep-rooted problems, including poor lending practices. These vulnerabilities are holding back credit growth and reducing confidence in banks.
Country authorities have taken steps to address these pressures, including through increases in minimum capital requirements, injections of capital, mergers and closures of problem banks, and the strengthening of supervisory laws and regulations. But more remains to be done.
A careful sequencing of reforms is needed, starting with a proper identification of bad loans and capital needs.
Second, timely intervention into weak banks is essential to minimise the risk of vulnerabilities spreading further through the broader financial system. Any government support should be provided under strict conditions—for example, funds should be channeled only to viable banks with adequate guarantees—that help minimise costs to the public sector.
Third, liquidation of bad assets, and openness to private investment in the sector should be pursued transparently, with the goal of promoting competition.
Finally, regulators must continue to strengthen lending practices, develop and implement crisis management frameworks, and fully enforce prudential regulations.
Financial sector repairs will complement the region’s ongoing fiscal, monetary, and structural reforms in various ways. Fiscal consolidation is needed to address the wider fiscal deficits and higher debt generated by the earlier (and appropriate) increases in public spending to support growth. But this should strike a balance between supporting economic activity in the short term and ensuring sustainability in the long term, while prioritising productive investments and protecting the poor. A strong financial sector will help this process by not only reducing potential fiscal pressures, but also supporting a successful debt-management strategy.
30 GEORGIA Country Report September 2017 www.intellinews.com