Economy
Posted: 1 month ago

Why National Bank Recommends Business to Make Forward Deals

Georgian business companies prefer to minimize currency risks because the main part of products are imported in Georgia, while the same products are sold in GEL and currency risks arise naturally.

Business companies will face many problems along with growing volatility of GEL. Sales price of imported goods have become also unclear.
 
Amid growing risks the National Bank of Georgia (NBG) recommends business companies to reinsure risks. Several days ago the NBG vice president Archil Mestvirishvili met with representatives of business associations and urged to widely apply hedging instruments in deals.
 
Currency forward deals as one of the mechanisms were mentioned at the meeting. This deal enables to make currency deals under today’s specific exchange rate, but payment may be carried out in the future.
 
As known, various hedging mechanisms are applied mostly by major companies, including oil importer companies.
 
There are several offers of forward deals on Georgia market. For example, EUR forward deal terms and 500 000 EUR contract conditional description for one of the commercial banks is as follows:
 
Deal amount - 500 000
Currency exchange rate: 1 EUR = 3.25 GEL
Forward deal margin – 10% interest rate
Deal maturity – 2 months
Forward exchange rate: 1 EUR = 3.2676 GEL, calculation principle: (3.25 +3.25*10%/12*2);
Forward price - 3.2676. The company fully insures any currency exchange rate volatility for two months.
 
Iva Chkonia, president of Georgian Distributors Association, told BMG that the NBG gave recommendations to the business sector for applying forward deals a year before. Both importers and domestic manufacturers depend on currency exchange rates because raw materials are imported, but the instrument of forwarding deals is not practiced in private sector of Georgia, Chkonia said.
 
Today, the small and medium business has no due resources for concluding similar contracts, he added.
 
According to my information, oil importer companies use this mechanism. Small and medium business such as distribution business do not practice this instrument, because the forward deal component raises the prime costs”, Chkonia noted.