Georgia: Technical Assistance Report-Report on Stress Testing the Central Bank Balance Sheet and Developing Hedging Markets

Technical Assistance Reports, May 10, 2024

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Canonical URL: Georgia: Technical Assistance Report-Report on Stress Testing the Central Bank Balance Sheet and Developing Hedging Markets

This CD engagement covered two distinct areas to help the National Bank of Georgia (NBG) deliver on its price stability mandate:
- 1) Provided a forward-looking analysis of the NBG’s balance sheet to assess its policy solvency and to help institutionalize such a process.
- 2) Outlined a strategy to develop hedging instruments in interest rate and foreign exchange (FX) markets to support monetary policy transmission.
Publication date: May 10, 2024.

The NBG balance sheet is robust, reflecting virtually no interest-bearing liabilities.
Under the adverse shock scenario, the NBG balance sheet improves on account of FX revaluation gains.
Higher inflation has a supportive effect: the need for a higher policy rate generates larger domestic interest income.
Institutionalizing forward-looking balance sheet analysis provides early warning capacity for:
- the need to reduce dividend payments, or
- the need for re-capitalization,
- thereby supporting operational independence.

Enabling conditions in Georgia:
- A supportive regulatory environment is in place.
- Market infrastructure is robust.
- A range of instruments is available to serve as the underlying instrument for derivatives.
Structural challenges:
- Lack of heterogeneity of financial risk profile and appetite amongst participants limits hedging market development.

Set up a standardized FX forward trading platform.
Push for upgrades of banks’ treasury management systems.
Support the targeted education and training efforts of the Georgian Financial Markets Treasuries Association.
Revise the current FX forward index to be more informative by publishing outright transacted rates.
Publish Overnight Indexed Swap benchmarks.