Dollar Gains Threaten Emerging World But Georgia Says It's Ready

(Bloomberg) -- Georgia has the tools to ride out the turbulence from a stronger dollar that may hurt the entire emerging world, with its free float being the first line of defense for the Black Sea nation, according to central bank Governor Koba Gvenetadze.

“A historical strengthening of the U.S. dollar at present is a risk for all developing, emerging countries,” Gvenetadze said Sunday in an interview in Washington, where he attended the International Monetary Fund spring meetings. “But we’re ready for a stronger dollar.”

Dollar Gains Threaten Emerging World But Georgia Says It's Ready

Koba Gvenetadze

Photographer: Helena Bedwell/Bloomberg

While emerging-market volatility is near the lowest since 2015, developing nations are bracing for outflows as the U.S. Federal Reserve continues tightening its monetary policy this year while other major central banks hold rates steady or ease. That divergence is set to strengthen the dollar, making it more difficult for non-U.S. issuers that sell dollar-denominated debt.

While the dollar has lost more than 4 percent against the euro since reaching a 14-year peak in December, analysts surveyed by Bloomberg on average see the greenback recover 2.5 percent against the common European currency by the end of the second quarter.

For Georgia, whose $14 billion economy already suffered currency shocks from nearby Russia and Turkey, the task of managing a stronger dollar is complicated as the authorities try to encourage savers to keep their money in lari-denominated bank deposits. Experiences of other countries have shown that cutting back on the widespread use of dollars for transactions is “a long-term project,” according to Gvenetadze.

Dollarization still remains, and it’s the main challenge for the Georgian economy and for the financial system,” he said, adding that the U.S. currency accounts for close to 70 percent of total deposits. That’s “a problem because it weakens the transmission of monetary policy to the real economy. It also lowers the shock-absorbing capacity of the floating exchange rate.”

Dollar Gains Threaten Emerging World But Georgia Says It's Ready

Gvenetadze became governor in March 2016 after the government accused the central bank of doing too little to defend the lari, which plunged 21 percent against the dollar in 2015. Dogged by a lack of trust in the domestic currency, a legacy of hyperinflation and bank failures in Georgia, the central bank has made boosting trust in the lari one of its signature issues under Gvenetadze.

While it’s the best performer among its ex-Soviet peers this year with a gain of about 10 percent, Gvenetadze said the Georgian currency remains “close to its fundamentals,” pledging to keep the exchange rate freely floating.

Its currency’s flexibility is one of the factors that will help Georgia prepare for dollar strengthening, according to Gvenetadze.

“Once economic agents know there is a floating exchange rate, and they gather all the information and analysis, all this is incorporated in their plans and projections,” he said. “And it helps us to move from one point to another point, whether it’s appreciation or depreciation.”