Wednesday August 14, 2019 - 12:26:37 GMT
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The unusual case of the Georgian Forex market
This year’s Forex market has been relatively normalized aside from some mishaps in the UK due to Brexit pressures and the newly started Hong Kong protests sending the markets ablaze and introducing a whole new level of speculation.
However, most of the world managed to lose track of a very small region nestled in the Caucasus that managed to reach record inflation rates in 2019. The case will be concerning Georgia, a Christian country in the Caucasus, with Russia to the north and Turkey to the South-West.
In June 2019, the country was embroiled in political controversy with its northern neighbor, Russia, which acts as the primary market for Georgian exports such as wine and other services. The political tensions flared up when a Russian deputy visited the country, which caused an uproar of the local population.
The reason why it caused an uproar is due to a long-standing tension between Russia and Georgia due to two wars they fought within three decades. One for Abkhazia and another for South Ossetia. Georgia lost both of these wars, as their overall population is barely equivalent to Russia’s military reserves.
Ever since then political relations had been non-existent while economic partnerships have been blossoming for both Russian and Georgian companies.
Cutting off a major industry
The uproar that happened in Georgia, caused the Russian deputy to pack up and leave the country as fast as possible. This act was perceived as aggression towards the Russian people by the state Duma. Due to this, Vladimir Putin decided to prohibit any and all Russian airlines to conduct direct flights to Georgia, causing massive issues for the local tourism industry.
It’s important to note that almost all of the foreign reserves that are funneled into the country come from the tourism industry as that’s what most Georgian businesses rely on according to statistics from Kapitali, a local business, and finance media outlet. Cutting off potentially millions of visitors during the main season would have been a major hit to the local currency, and it was.
Although statistics are already known which show that the number of tourists actually increased during the ban, it still didn’t convince speculators to continue their bearish stance towards the Georgian Lari.
Several Georgia private banks reported record exchange rates which sky-rocketed to GEL’s exchange rate relative to the dollar from 2.75 to 2.85 within a week.
Unfortunately, though, that was not the end of it as one Georgian journalist had yet another major controversy under his sleeve.
Controversy after controversy
There have been thousands of politicians, government officials, journalists and social activists who have criticized the Russian president, Vladimir Putin. But very few have gone to the lengths that one Georgian journalist decided to.
A journalist by the name of Giorgi Gabunia, who was a host of a popular TV show for the country’s alternative media channel Rustavi 2, insulted and cursed at Putin on the air in the Russian language, shocking both Georgian and Russian viewers.
Even though deep down all Georgians emphasized with the words Gabunia said, they still perceived it as a terrible political issue, causing strikes at the media headquarters and even more pressure from Russia.
Russian state officials then recommended Putin to impose even more sanctions on Georgia, in the form of banning transactions to and from the country, potentially cutting off hundreds of Georgian companies from their main source of income.
Although the sanctions were never imposed, the anticipation alone was enough for both institutional and retail investors to quickly diversify into foreign currencies. As a result, the GEL plummeted to even further lows and broke yet another record in its inflation history.
At most, several private banks in Georgia were reporting exchange rates of 3.01 relative to the dollar.
Attempts to extinguish the fire
At first, Georgian government officials were trying to extinguish the fire by spreading information about the recent depreciation. Calling it just speculation and panic didn’t really help much as the exchange rate stayed above the 3.00 mark for a couple of days, fluctuating back and forth.
Fearing the quarterly revenue reports from tourist companies in the country that will happen sometime in October and potentially send the GEL even further down, the National bank decided to sell $40 million on the exchange market within a single day.
Only $33 million managed to be sold, which stabilized the GEL a little bit and helped it climb down to a more “psychologically manageable” 2.95 for a while.
But there is absolutely no doubt that when tourist agencies, hotels and casinos make their reports in October, it’s going to give speculators yet another reason to stay bullish on the GEL.
What does this teach us?
This is a primary example of why exotic currency pairs come with such large spreads with multiple Forex brokers. None of those currencies have any stability whatsoever, therefore not cashing in during periods of mass volatility would be a waste from every operator.
A country that is almost entirely dependant on one market for the majority of its main exports is guaranteed to face some issues in the long run, especially when that economic partner is considered an enemy by the majority of the population.
Overall, the Georgian Forex market remains as uncertain as ever, because nobody knows when Russia may hit with new threats for economic sanctions or where they could decide to retaliate against Georgia’s western aspirations.
Just recently, they announced that the quality of Georgian wine, the country’s main export, has diminished exponentially and does not meet local standards. Experts say foul play, but company bank accounts scream for help.
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