TBC business strategy – optimal currency funding structure for the Georgian corporate sector

Otar Nadaraia, TBC Group Chief Economist

We thank the business representatives who actively use the TBC Capital optimal foreign currency funding structure when taking on debt. Of particular importance are the working meetings that integrate macro- and microeconomic views, particularly from the business perspective. As always, past trends do not guarantee future outcomes. However, the potential gains are significant – estimated at around GEL 8 billion since 2013. For comparison, Georgia’s current corporate loan stock is around GEL 22 billion. Therefore, we revisit our approach first published in 2019, noting its continued relevance to SMEs, individuals, and investors – though tailored communication is necessary for each group.

We begin by demonstrating the framework’s functionality in volatile conditions. For instance, recent shifts in U.S. tariff policy under President Trump illustrate how quickly market expectations can change. While just recently tariffs were seen as USD-supportive, market sentiment has since performed a U-turn. Changing sentiments can easily be inferred from the declin-ing trajectory of the expected Fed rate, as well as from net speculative positions, which indicate expectations of EUR strength-ening (Figure 1).

In such uncertainty, our framework emphasizes medium-to-long-term indicators over short-term news. A prime example occurred when the EUR/USD dipped below parity in the autumn of 2022. Though further EUR depreciation seemed possible, our framework—based on long-term equilibrium estimates—recommended minimizing EUR-denominated borrowing. Howev-er, EUR loans increased in Georgia instead (Figure 2). This misalignment highlights the kind of situations that have produced large unrealized gains. Having said that, recently, the dynamics of foreign currency borrowing are more aligned with our frame-work, which is a welcome development

As the EUR strengthens, borrowing in EUR becomes more favorable—albeit within limits and based on validated medi-um-to-long-term undervaluation indicators; this topic is extensively explored in our other publications. Similar principles apply to GEL, as displayed in Figure 3. At the same time, per our framework, it is important to keep in mind that estimates are not always based on medium- and long-run indicators. The more developed and deep the markets are, the more we can be orient-ed towards underlying variables. In contrast to the EUR/USD, where underlying variables are more accessible, GEL and other currencies like UZS benefit more from in-house analytics.

When calculating the GEL 8 billion gain within our framework, we assume only reasonable adjustments to the GEL/EUR/USD weights. If a company is hedged with, for example, a 30% foreign currency loan, the framework does not recommend a full switch to foreign currency loans, even if GEL is highly undervalued compared to its equilibrium estimate. Rather, a moderate increase in FX exposure would be more aligned with our framework.

Moreover, we base our gain estimates on current larization trends and real-time data to ensure they reflect practical, real-world conditions. In case of more aggressive finetuning of the currency structure, the potential for additional gains would increase. This area of the framework is particularly useful in cases when businesses try to profit from exchange rate forecasts; thus, it is highly dependent on individual businesses’ strategies and risk appetites.

A crucial first step in implementing a foreign currency funding strategy is identifying the currency in which a business is natural-ly hedged (i.e. insured against currency risk). For example, if a company’s USD-denominated EBITDA remains stable regardless of fluctuations in GEL, then the company is hedged if the loan is also denominated in USD. While this may sound simple, in practice it is hardly so. Real estate prices, for instance, are neither fully in USD nor GEL.

And how can we utilize EUR, considering that GEL is more stable against EUR and economic growth is higher in Georgia when EUR appreciates against USD? Notably, this is not always the case. In the case of a Russia-Ukraine conflict resolution scenario, both migrant outflows and EUR appreciation would be highly likely, but this would not necessarily result in GEL appreciation or higher activity in the real estate sector. Each industry reacts differently. For instance, exchange rate changes affect second-hand car imports more significantly than new car sales, suggesting the need for sector-specific analysis. Furthermore, if imported product prices rise by only 30% of the GEL’s depreciation, then holding 30% of debt in foreign currency does not necessarily constitute risk. Here we also note that the optimal share of foreign currency will increase further if we utilize two or more currencies due to lower risk brought by diversification.

Other considerations include industry cyclicality, pricing sensitivity, interest rate differentials, currency conversion costs, and the broader macroeconomic environment’s impact on a company’s leverage and efficiency. These foundational steps must be completed before exchange rate forecasts and valuation misalignments can inform tactical decisions.

Finally, we would like to once again underline the importance of considering macroeconomic factors in business strate-gies—particularly when optimizing the currency composition of funding structures.