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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.
13.05.2014 | Tuesday

Common Challenges Facing the Elderly in Georgia

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

Paternalism in Georgia

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.
29.09.2014 | Monday

Georgians Have High Hopes but Little Information about the Association Agreement with the EU

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

The Wave of the Future: Optimism, Pessimism and Fatalism in Georgia

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.
04.12.2014 | Thursday

SME Performance in Georgia and Armenia: Part 2

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

Trends in the Data: Declining trust in the banks in Georgia

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

Household income and consumption patterns in Georgia

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

Georgia and the EU’s Economic Woes

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

PERCEIVED POVERTY IN GEORGIA: RESULTS OF THE 2011 CAUCASUS BAROMETER

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

A Further Look at Material Deprivation

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

Can a Cut NATO Supply Route Through Russia Benefit Georgia and Azerbaijan?

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.
30.03.2010 | Tuesday

2010 Big Mac Index | Increased differences between Baku and Tbilisi

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).
 
27.02.2008 | Wednesday

Inflation in Armenia? | Lecture by IMF Representative

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.
12.09.2008 | Friday

Doing business in Azerbaijan: easy in theory

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.
08.05.2017 | Monday

Debts and Loans in Georgia (Part 1)

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