Tbilisi (GBC) – The National Bank of Georgia's (NBG) 2024 financial stability report talks about the main risks to financial stability. The NBG singles out several factors, namely: risks of possible prolongation and escalation of geopolitical conflicts, slow normalization of monetary policy by leading central banks, cyclical downturn in the real estate market and worsening external factors.
Risks of possible prolongation and escalation of geopolitical conflicts
Risks arising from the Russia-Ukraine war and geopolitical conflicts in the Middle East remain at a high level. This causes macroeconomic vulnerability both globally and in trade partner countries. Prolongation of geopolitical tension in the region can become a source of inflationary pressure, which is also facilitated by the current events in the Red Sea. In addition, the turbulent geopolitical environment may negatively affect investor sentiment in the region and lead to an overestimation of the country's sovereign risk.
Slow normalization of monetary policy by leading central banks
Against the background of prolonged maintenance of globally tightened monetary policy, global inflation began to decrease gradually. However, it should be noted that the uncertainty related to the dynamics of inflation remains at a high level, which prompts the leading central banks to caution and slows down the pace of withdrawal from the tightened monetary policy. The increase in uncertainty related to price dynamics may lead to additional tightening of monetary policy and/or longer maintenance in its tightening phase.
Cyclical downturns in the real estate market
As a result of the war, the demand for real estate increased significantly due to increased migration to the country. In the wake of stopping the effect of migration, demand from the foreign sector has been replaced by domestic demand, which has been facilitated by strong economic growth. On the back of sustained strong demand, supply also increased, which was reflected in the increase in permits issued. Since the said demand is largely cyclical in nature, in the event of a significant reduction in economic activity, excessive concentration of labor force and investments in these sectors may lead to a sharp increase in unemployment and difficulties in servicing debt, which will negatively affect financial stability and the economy as a whole.
Deterioration of external factors
The Russia-Ukraine war had an uneven impact on Georgia's main trade partner countries. On the one hand, the economic situation in the countries directly involved in the war significantly worsened. On the other hand, a number of countries in the region saw an increase in remittances due to increased migration, which was reflected in their improved economic growth. In case of deterioration of the geopolitical situation in the region, a rapid outflow of capital from the mentioned countries is expected, which will worsen the economic growth of the mentioned countries. This will have a negative impact on Georgia's food demand and, therefore, on economic growth.