Lari remained broadly stable in 2014 while other currencies significantly lost their values against dollar. However, weaker external environment supported depreciation pressures as was anticipated and since mid-November lari has shown greater volatility. Lari lost 12.4% of its value against the dollar and 0.8% against the Euro year to date. However, it seems that lari is oversold and should more closely reflect fundamentals in the medium term. Inflation remains subdued (2.8% in November) and falling world commodity prices are helping economy to contain inflationary pressures in the face of currency depreciation. However, weaker lari is probably a gain for the economy, as depreciation could lead to substantial gains for price competitiveness and improve current account deficit through weakening Lari’s NEER and REER in the medium-term.
Lari remained broadly stable in 2014 while other currencies significantly lost their values against dollar. However, as we pointed out in our previous notes, moderate pressure on lari, owing to weaker external environment, was anticipated.
The lari’s recent depreciation against the dollar helped economy to absorb short-term imbalances. From February to mid-November 2014 lari remained mostly stable against the US$; it even appreciated by 2.3-2.6% against the dollar in summer, which prompted NBG to build reserves with a purchase of US$ 120mn. Since mid-November the lari has shown greater volatility, as was anticipated by weaker external environment (increased trade deficit, moderate growth of remittances and tourism revenues and weak FDI). Lari lost 4.7% against the dollar at the end of November and another 6.3% on 6 December. As a result, lari lost 12.4% of its value against the dollar, but just 0.8% against the Euro year to date.
Central bank interventions for defending lari were limited compared to the last year, when NBG sold US$ 220mn in November and December 2013. On 25 November 2014, NBG intervened and sold US$ 40mn to curb excessive lari volatility when currency weakened by 1.6% during a course of the day, and sold another US$ 40mn on 2 December.
We think that lari seems oversold and should more closely reflect fundamentals in the medium term. In recent weeks, the extent of depreciation was triggered by market overreaction, as was adjusting to weaker external environment and there was growing demand for imports owing to seasonality and increased government spending, in our view. However, some relief for the lari could come in the medium term as winter season will attract tourists, and falling world prices on Georgia’s major commodity imports (oil, food) could help to save on imports in coming months.
