Back Friday | 12 September, 2008
Credit Crisis in the Caucasus?
Over the past year questionable lending practices by major banks and lack of consumer education about credit risk in the United States among “sub-prime” borrowers caused a credit crunch that in turn erupted into a major financial crisis that threatens to lead to a recession and an international economic downturn.
Although little attention is paid to the issue of credit and debt, analogous risky practices are taking place in the banking sectors of the countries of the South Caucasus. A similar financial crisis in these countries could have a far more devastating effect, since one of the population groups most exposed to consumer debt is the small but consolidating middle class in the urban centers. This issue becomes particularly important in the wake of the August war in Georgia, as the region attempts to maintain economic stability in the face of infrastructural damage and reduced foreign investment.
The emerging middle class has been both a cause and a result of high levels of growth in the economies of all three South Caucasus countries over the past several years, and the banking sectors in these countries has been an area of particularly high growth because of structural reforms, increasing government regulation, and high demand for investment capital.
Banks have become more eager than in the past to extend consumer credit, but for a number of reasons interests rates in the region are extremely high: because of perceived risk of investment in the region and the risk of devaluation of local currencies (the highest interest rates for deposits are for accounts held in local currencies), and because of physical shortages of currencies as governments reduce outputs to combat inflation. Rates for consumer loans in the region average 15-20 percent, which are significantly higher than the 7-9 percent rates for sub-prime mortgages that precipitated the crisis in the United States.
Banks in the region have also been eager to introduce credit card services, offering the convenience of credit lines to their clients for purchases along the model long familiar in developed countries, with no interest if payments are made on time, but stiff penalties for missed payments. Advertising for loans and credit cards are ubiquitous in the capital cities, and credit booths are common in computer and furniture stores.
Yet although micro-credit programs have been functioning in the region for a number of years, particularly in rural areas, the whole phenomenon of commercial consumer credit is largely a new concept for the urban middle class. New borrowers have neither credit histories upon which banks can determine levels of risk, nor experience or deep understanding of the potential hazards involved in taking loans.
According to data from the Caucasus Research Resource Centers’ Data Initiative Project, while the number of households in Azerbaijan, Armenia and Georgia that take loans overall is not large (and real mortgages are practically nonexistent), the number is substantial enough to merit concern: 4% in Azerbaijan, 15% in Armenia and 9% in Georgia. The majority of those loans are for more than 100 USD (78% in the case of Georgia), and in Armenia and Georgia more than half of those who use credit have taken two or more loans. And while a portion of these loans in all three countries are taken for essential expenses such as medical care, utilities or food (demonstrating extreme poverty), approximately half of loans in all three countries are taken for consumption, investment or business purposes, or to repay previous loans.
While many consumers in the region may be making careful strategic choices in using credit, it seems that a significant amount of loans are being used for highly speculative investments, such as in real estate or in businesses that have been profitable in the past but are now close to saturation (e.g. restaurants and cafes and importing automobiles). The real estate markets in particular seem to be highly inflated in the urban centers (again, fueled by speculative trading financed by very high interest loans) and the resulting bubble is likely to burst if perception of a slowdown or reversal in rates of price increases were to appear.
For their part, banks in the region seem to take little interest in the types of projects that loans are being requested to finance, have set only the most minimal requirements for the extension of loans and credit cards (usually a letter from an employer stating a minimal average salary is sufficient), and have taken little initiative in providing consumer education for their clients.
High interest loans and risky investment decisions thus create a very real possibility of overextension by clients of consumer credit who owe more money than they currently earn, which in turn presents a very serious risk of a financial crisis that could threaten to undermine the banking and real estate sectors, particularly given the shocks to the system that resulted from the Georgian-Russian war in August. Such a financial crisis would most likely have far more serious consequences for the fragile economies of the South Caucasus countries than in more developed countries. It would threaten most directly the nascent middle class, which is such an important constituency for the further development of stability, rule of law and democracy in the region, and could therefore have serious consequences as well for the political stability of the region. It is in the interests of both governments and commercial banks and loaning organizations in the region to forestall such a crisis by implementing more rigorous requirements before extending credit and devoting resources to consumer education.
31.08.2015 | Monday
A fair share of the Armenian, Azerbaijani and Georgian population still lives in poverty and cannot afford to buy certain durable goods. According to CRRC’s 2013 Caucasus Barometer survey (CB), in Georgia, 28% of the population reported they did not have enough money for food; 33% had enough money for food, but not for...
17.08.2015 | Monday
While Georgia has yet to be officially declared an upper middle income country by the World Bank, as a result of the 2014 census, it’s likely to be labeled one after the final census results are published in April of 2016. Interestingly, Georgia likely became one in 2013. Why is this the case and what are the implications?
27.07.2015 | Monday This blog post looks at the World Bank’s STEP data for Armenia and Georgia, which CRRC collected in 2013, to see how people are finding work, their confidence that they have the skills needed to find work, and how they feel their education prepares them for work.
04.02.2014 | Tuesday
Following the world financial crisis of 2007-2008 and the global recession of 2008-2009, GDP growth slowed and unemployment increased in many countries. From a peak of 12.34% GDP growth in 2007, Georgia’s GDP contracted by 3.78% in 2009, leveling out to an average of 6.4% GDP growth over 2010 to 2012. Official unemployment in Georgia also worsened over that period, starting at 13.3% in 2007, peaking at 16.9% in 2009 and falling down to 15% by 2012.
04.03.2014 | Tuesday
With the recently concluded Olympics in Sochi and the controversies surrounding them, one might be interested in understanding how populations in the South Caucasus think about health and sport. What factors are related to perceptions of health in Armenia, Azerbaijan and Georgia?
17.03.2014 | Monday
With Russia’s recent military intervention in the Ukraine, some commentators have begun to compare Ukraine to Georgia in 2008. In August 2008 Russian troops entered Georgian territory, resulting in the expulsion of the ethnic Georgian populations of the breakaway territories of South Ossetia and Abkhazia.
26.01.2015 | Monday The world population is getting older, and this trend will likely continue as a result of decreasing mortality and declining fertility. International organizations predict that the aging of the population will cause economic problems in countries that already have difficulties in providing proper welfare for the elderly. The countries of the South Caucasus are no exception in this regard.
19.01.2015 | Monday
Taxi drivers tell perhaps the most telling story of Georgia’s economic transition. They often complain that the transition made their high social status useless, thus pushing them into taxi driving. This often heard and mocked complaint highlights the contrast between what is expected from and what is delivered by the labor market. This blog post shows that the taxi drivers are not entirely wrong.
22.01.2015 | Thursday This blog post examines how social status is associated with individual and household well-being
24.03.2014 | Monday
In Stephen Jones’ 2013 book, Georgia: A Political History since Independence, he argues that economic issues are more important to the average Georgian than issues related to nationalism. According to Benedict Anderson’s classic exegesis of nationalism, Imagined Communities, a nation is defined as, “an imagined political community - and imagined as both inherently limited and sovereign” (Anderson 2006).
07.03.2014 | Friday
Happiness is an issue that has been the subject of philosophical and social science reflection at least since the ancient Greek philosopher Democratis (460 BC -370 BC) said, “Happiness resides not in possessions, and not in gold, happiness dwells in the soul."
13.05.2014 | Tuesday
According to the World Health Organization (WHO), “Multiple social, psychological, and biological factors determine the level of mental health of a person at any point in time. In addition to the typical life stressors common to all people, older people are more likely to experience events such as bereavement, a drop in socioeconomic status with retirement, or a disability.”
19.05.2014 | Monday
According to the Stanford Encyclopedia of Philosophy, paternalism is “the interference of a state or an individual with another person against their will motivated by a claim that the person interfered with will be better off or protected from harm” (from the Latin pater for father). Simply put, paternalism refers to treating people as if they were children. The Caucasus Barometer (CB) assesses attitudes toward governance among Georgians. Who thinks citizens should be treated like children by the government (i.e. the paternalistic view) rather than as employers? Using data from the CB 2013, this blog post focuses on the following qualities of citizens: education level, economic condition and source of household income in order to better understand this paternalistic view in Georgia.
11.08.2014 | Monday
The three countries of the South Caucasus (Armenia, Azerbaijan and Georgia) are geographically, historically and politically bound closely together. Nevertheless, these countries often find themselves in disagreement when faced with broader geopolitical questions regarding alliances, threats and visions about the future of the region.
15.09.2014 | Monday
Authors Rahmato and Kidanu (1999) use the phrase “We live only for today” to describe a feeling whereby a person gives up on life and does not know or does not want to think about what will happen the next day. This phrase describes a state wherein people live day-to-day without hope for the future. This sense of helplessness or hopelessness with regard to the future is known as fatalism.
29.09.2014 | Monday
Optimism abounds with regards to the recently signed Georgia-European Union Association Agreement (AA). Most Georgians, however, lack information about the EU and its relation to the country, including the details of the agreement which directly concern the future of Georgia’s economy. The AA covers many areas including national security, migration, human rights and the rule of law but is primarily a free trade agreement with potentially major implications for employment.
07.10.2014 | Tuesday
A recent CRRC regional blog post analyzed the presence of fatalism in Georgia. The post cited CRRC Caucasus Barometer (CB) data which shows that in 2013, 28% of Georgians agreed that “everything in life is determined by fate.” While the CB findings demonstrate that a sizeable portion of the adult population is fatalistic about the future, Georgians are increasingly likely to see that future in a positive light, whether it be determined by fate or not.
28.03.2016 | Monday
While territorial integrity was named by the majority of the population as the most important issue facing Georgia in late 2008 and 2009, in the aftermath of the 2008 war with Russia, the focus has since shifted to economic issues and, first of all, unemployment.
27.11.2014 | Thursday
The CRRC Caucasus Barometer (CB) survey results demonstrate that Georgians exhibit relatively high levels of interpersonal and institutional trust when compared to their Armenian neighbors. Trust is an important component of “social capital,” which is widely perceived to be a necessary condition for a thriving entrepreneurial class and small and medium enterprise (SME) sector.
04.12.2014 | Thursday
As discussed in the first blog post of this series, the results of the CRRC Caucasus Barometer (CB) survey show that Georgians demonstrate higher levels of interpersonal and institutional trust than Armenians. These types of trust are important indicators of social capital, which is often taken as a necessary condition for the presence of a robust, productive entrepreneurial class and small and medium enterprise (SME) sector.
05.09.2016 | Monday The last few years have been turbulent for Georgia’s national currency, the Lari (GEL), the value of which started to decline in November 2014. While in October 2014 one US dollar traded for GEL 1.75, since February 2015 to date, the exchange rate has fluctuated between GEL 2 and 2.5 per dollar. Needless to say, the depreciation of the Lari has been widely covered by the media, and although it had numerous causes, a number of organizations and people were blamed for the devaluation. With this background in mind, this blog post looks at how reported trust in banks has changed in recent years in Georgia, using CRRC’s Caucasus Barometer (CB) survey data.
09.11.2015 | Monday
After the collapse of the Georgian economy in the 1990s, the country slowly started to recover, and between 2000 and 2014, the gross national income grew from $3.4 billion to $16.7 billion (in current USD). According to the National Statistics Office of Georgia, the official unemployment rate in Georgia was 12.4% in 2014, but according to numerous surveys the rate is much higher.
14.03.2012 | Wednesday
Why hasn’t the economic crisis in Europe deterred Georgia’s desire to join the European Union? The majority of Georgians (and the Georgian government) want to join the EU despite crisis in the Eurozone. Yet, the continued crisis, including the Eurogroup’s recent (and second) rescue of Greece’s economy and Hungary’s harsh austerity measures, illustrates that the crisis is not isolated to the Eurozone.
13.07.2012 | Friday The 2011 Caucasus Barometer asked the Georgian population, “Relative to most of the households around you, would you describe the current economic condition of your household as very good, good, fair, poor or very poor?
02.11.2011 | Wednesday
Continuing to explore standards of living in the South Caucasus, this blog looks at the between four sources of household income and material deprivation using data from the 2010 Caucasus Barometer. Each of the four sources of income (salaries, pensions or government transfers, sales from agricultural goods, and remittances) are categorized by their importance to the household and then cross tabulated with material deprivation. The findings suggest that families reliant on salaries and remittances are better off, while families receiving pensions and government transfers, or those who sell agricultural products as their primary source of income have higher than average rates of material deprivation.
07.12.2011 | Wednesday
The 20th anniversary of the dissolution of the Soviet Union is upon us, and US-Russian tensions have risen as Russia contemplates terminating the NATO supply route through Russia. International news reports such as The New York Times detail the threat as a “death blow” to the U.S.-led NATO mission in Afghanistan and indicate that this could be a blessing in disguise for NATO hopeful Georgia, as well as for Azerbaijan.
14.01.2010 | Thursday
How are Georgians doing financially, how much do they earn and what do they spend on? CRRC’s Data Initiative allows for an in-depth analysis of these and similar issues on the economic status of the population across the South Caucasus.
15.03.2010 | Monday
Migration is a major factor in Georgia. Many Georgians live abroad, and by some estimates the money they send back accounts for nearly 10% of Georgia’s GDP. Did you know that households in rural areas who receive such aid are less likely to be poor, but that in Tbilisi, the opposite is true?
30.03.2010 | Tuesday
In 2007 we wrote a blog post on the Big Mac Index, an index published by The Economist as an informal way of measuring purchasing power parity (PPP). The idea is that a dollar should buy you the same amount in all countries, and as a Big Mac is assumed to be produced in the same way everywhere it can serve as a point of comparison. You can thus determine how far off the exchange rate is between countries, in terms of citizens’ ability to buy the same “basket” of goods and services (in this case a Big Mac hamburger).
27.05.2010 | Thursday
Banking is one of the fastest-growing sectors of the Georgian economy, a point which was underlined in a 2009 report from the Ministry of Economic Development of Georgia. But does this development mean that society views banks as trustworthy partners for households (HH) in Georgia?
10.09.2010 | Friday
While writing his PhD, Aleksey Hovakimyan was a regular user of CRRC-Armenia, often working in the computer lab or the library. We therefore were delighted to hear that his PhD thesis has now been published, and wanted to support him in spreading the word of his book's release.
27.02.2008 | Wednesday
Readers here may not be aware that actually our Armenian CRRC also runs its own blog, to announce and describe CRRC's events. One of the most recent events was a lecture by the IMF Resident Representative in Armenia, Dr. Nienke Oomes.
15.04.2008 | Tuesday
A slightly specialized topic: what's the cost of tourism? Often suggested as a way of developing parts of the South Caucasus, especially Georgia, quickly, it's interesting to take a quick look, since in tourism many factors interact: business, environment, architecture, urban planning, societal habits, local versus national government, local and foreign expectations, and the challenge of reconciling all of those.
06.06.2008 | Friday
At first glance it may seem that trade between the Georgian region of Samtskhe-Javakheti and the neighboring Armenian region of Shirak should provide a natural basis for development in both regions. However, the main border crossing point in Samtskhe Javakheti is under-utilized and trade is not creating stimulation for growth in either region.
12.09.2008 | Friday
Results of the World Bank’s Doing Business 2009 project, claims to present "objective measures of business regulations and their enforcement across 181 economies and selected cities at the sub-national and regional level", were made public today.
02.10.2008 | Thursday
In Georgia, attention now turns towards sorting out the impact of the short August conflict. How plausible is the reporting we are seeing? Do the journalists get it right?
03.10.2008 | Friday
Recently, as a result of the football diplomacy between Armenia and Turkey, an opinion poll was conducted in both Turkey and Armenia to gauge the reaction to new gestures in the Turko-Armenian relationship. The poll was carried out by MetroPoll in Ankara (Turkish only website) and by the Armenian Center for National and International Studies -- run by Rafik Hovannisian an American Diaspora Armenian now resident in Yerevan and involved in Armenian politics.
03.10.2008 | Friday
The IMF has recently published its analysis of the developments in non-oil tax policy, administration and revenues in Azerbaijan. Non-oil tax policy could be an important tool in stimulating the development of non-oil sectors of the country’s economy.
07.10.2008 | Tuesday
So what plagues local business? In many cases it's the same problem we have in politics as well: there simply is the wrong paradigm. It is self-centered, rather than being other-centered. Or, if that sounds too much like marriage counseling, let's put it this way: too many sellers try to solve their own problems, rather than those of other people. Nothing wrong with that, but it's not how you can succeed in a market. After all, who likes to spend their money on other people's problems? Charity is not a business model, at least not in retail.
11.12.2007 | Tuesday The World Resources Institute, a global environmental think tank based in Washington DC, is providing maps that allow a visual comparison of data for the countries in the South Caucasus. Called "Funnel the Money", it seeks to chart development within countries, and also track allocation of resources from the central government by providing regional comparisons.
22.11.2008 | Saturday
One of the most impressive recent survey efforts, measuring attitudes about different countries in transition, has been undertaken by EBRD. Called Life in Transition Survey (LiTS), this is an attempt to look at how 29 'transitioning' countries have developed following 1989. The survey tracks "public attitudes, well-being, and the impact of economic and political change".
11.11.2007 | Sunday We normally leave political analysis to the many other qualified commentators. However, given current events, it is interesting to see that our Data Initiative shows that ever since 2004 there was a powerful trend of disenchantment in Georgia. Below, see the responses we received when asking "Do you think that things in our country are moving in the right direction?" Blue is positive, yellow negative. The data is for Tbilisi.
27.08.2007 | Monday
Two years ago, Tigran Sargsyan, the Chairman of the Central Bank of Armenia, wrote a brief paper looking at various facets of the economies of the countries of the South Caucasus from four different vantage points including an evaluation of compliance with the Maastricht Treaty, the relationship between each country’s economic processes and the creation of human capital, macroeconomic effectiveness, and the actual sustainability of development.
20.08.2007 | Monday Economic free zones in Georgia are no longer a necessary, helpful, or even relevant option for Georgia’s economic development according to a GFSIS article written by Vladimer Papava. A free economic zone is a discreet area of a country’s economy designated by the government and bestowed with certain benefits and privileges.
08.05.2017 | Monday In Georgia, where, according to the World Bank, a third of the population live on under USD 2.5 per day, poverty and unemployment are consistently considered the most important issues facing the country. For those who are struggling financially, borrowing is a widespread coping mechanism. While access to credit can have benefits, debt can also have psychological costs, such as increased stress and anxiety. CRRC’s 2015 Caucasus Barometer (CB) data show interesting patterns about having personal debts in Georgia. The first part of this blog post focuses on the characteristics of those who report having personal debts in Georgia, while the second part looks at the money lending patterns, as well as reported well-being of people who are owed money or who borrow it
15.05.2017 | Monday The first part of this blog post showed that people who report being in a worse economic situation are more likely to have debts in Georgia. In the second part of this blog post, a new variable is added to the analysis, “Does anyone owe you any money?”
12.02.2018 | Monday What are the factors that help one get a good job? The question is important around the world, and arguably even more important in countries with high reported unemployment, like Georgia and Armenia. While it would require an in-depth study of the labor market of a given country to find out what actually helps a person get a good job, what people think about this issue is also interesting. CRRC’s 2017 Caucasus Barometer (CB) survey asked the population of Armenia and Georgia which factors where important for getting a good job in their country.
26.02.2018 | Monday According to CRRC’s 2017 Caucasus Barometer (CB) survey, 46% of the population of Georgia report having personal debt. Although having debt is not necessarily a bad thing, since it can enable investment to help improve a person’s economic conditions, a close look at the CB 2017 data suggests that many people in Georgia take on debt to cover basic expenses.
26.03.2018 | Monday Busy restaurants and cafes are a common sight in Georgia, and CRRC’s Caucasus Barometer data suggest that restaurants and cafes have become busier over the last five years. While 27% of Georgia’s population reported going to a restaurant in 2012, five years later 50% did. There is an upward trend for both men and women, yet the data also suggests there is a significant gender gap. Taking into account other social and demographic characteristics, women are significantly less likely to go to restaurants than men.
28.05.2018 | Monday People in Georgia consistently name unemployment as the main problem the country faces. Women, compared with men, report having a job less often. Based on CRRC/NDI December 2017 survey findings, this blog post presents the population’s perceptions of some of the issues that women in Georgia face that may partially explain women’s lower labor force participation rate.
10.09.2018 | Monday On July 21, 2018 Georgian legislators approved an accumulative pension scheme, after years of discussion. As one of the requirements of the new law, employees with contracts who are under the age of 40 have to contribute 2% of their remuneration to the state-run pension fund, on a monthly basis. Although other employees are not legally required to do so, they may participate in the scheme voluntarily. This law is a first step in a larger reform of Georgia’s pension system. Opposition politicians have criticized the new law citing that it counters the country’s constitution as it introduces a new tax without a referendum. Several civil society groups also expressed criticism of the reform, questioning its legitimacy.