The Correlation Between Georgian Lari and Commodity Prices

The Correlation Between Georgian Lari and Commodity Prices

Blog • 1-07-2024, 11:55

The Georgian Lari (GEL) is the national currency of Georgia, and its value is influenced by a variety of economic factors, including the country's trade balance, interest rates, and inflation. One important factor that can impact the value of the Lari is the price of commodities, particularly those that are important for Georgia's economy. In this article, we will explore the correlation between the Georgian Lari and commodity prices, examining how changes in the prices of key commodities can affect the currency's value and the broader Georgian economy.

1. Georgia's Commodity Exports
Georgia is a small, open economy that relies heavily on exports to generate foreign exchange earnings and support economic growth. Some of the country's key commodity exports include:

- Copper ores and concentrates
- Ferroalloys
- Wine
- Mineral waters
- Nuts (particularly hazelnuts)

Changes in the prices of these commodities can have a significant impact on Georgia's export earnings and, in turn, the value of the Lari. When the prices of Georgia's key commodity exports rise, it can lead to increased foreign exchange inflows, which can support the Lari's value. Conversely, when commodity prices fall, it can lead to reduced export earnings and put downward pressure on the currency.

2. Oil Prices and the Georgian Lari
While Georgia is not a major oil producer, changes in global oil prices can still have a significant impact on the Lari's value. This is because oil prices can affect the economies of Georgia's major trading partners, particularly Russia and Azerbaijan, which are significant oil exporters.

When oil prices are high, it can boost economic growth and foreign exchange earnings in these countries, which can lead to increased demand for Georgian exports and support the Lari's value. On the other hand, when oil prices fall, it can lead to economic slowdown and reduced demand for Georgian exports, putting downward pressure on the Lari.

Additionally, changes in oil prices can affect Georgia's trade balance and inflation rate. When oil prices rise, it can increase the cost of imports, particularly for fuel and energy-intensive goods, which can widen the trade deficit and put upward pressure on inflation. This, in turn, can lead to a depreciation of the Lari.

3. Commodity Prices and Monetary Policy
The correlation between the Georgian Lari and commodity prices can also have implications for the country's monetary policy. The National Bank of Georgia (NBG) is responsible for setting interest rates and managing the money supply to maintain price stability and support economic growth.

When commodity prices are rising and putting upward pressure on inflation, the NBG may need to tighten monetary policy by raising interest rates to curb inflationary pressures. This can make the Lari more attractive to foreign investors seeking higher returns, leading to increased demand for the currency and supporting its value.

Conversely, when commodity prices are falling and economic growth is slowing, the NBG may need to loosen monetary policy by lowering interest rates to stimulate borrowing and investment. This can lead to a depreciation of the Lari, as lower interest rates make the currency less attractive to foreign investors.

4. Commodity Price Volatility and Exchange Rate Risk
The correlation between the Georgian Lari and commodity prices can also create exchange rate risk for businesses and individuals operating in Georgia. Commodity prices can be highly volatile, influenced by a range of factors such as global economic conditions, geopolitical events, and supply and demand dynamics.

This volatility can translate into fluctuations in the Lari's value, creating uncertainty and challenges for those involved in international trade or holding Lari-denominated assets. For example, a Georgian exporter may face reduced profits if the Lari appreciates while commodity prices are falling, as they will receive fewer Lari for each unit of foreign currency earned.

To mitigate these risks, businesses and individuals may need to employ hedging strategies, such as using forward contracts or options to lock in exchange rates and protect against adverse currency movements. The NBG can also play a role in managing exchange rate risk by using monetary policy tools and foreign exchange interventions to smooth out excessive volatility in the Lari's value.

5. Long-Term Trends and Diversification
While the correlation between the Georgian Lari and commodity prices can create short-term challenges and opportunities, it is important to consider the long-term trends and the need for economic diversification.

Relying heavily on commodity exports can leave Georgia vulnerable to external shocks and price fluctuations, which can create boom-bust cycles and undermine long-term economic stability. To mitigate these risks, Georgia may need to focus on diversifying its export base and developing new industries that are less dependent on commodity prices.

This could involve investing in higher value-added sectors, such as technology, services, and manufacturing, which can generate more stable and sustainable foreign exchange earnings over time. Additionally, promoting greater regional integration and expanding trade ties with a wider range of partners can help to reduce Georgia's exposure to commodity price shocks and support a more resilient economy.

The correlation between the Georgian Lari and commodity prices is a complex and multifaceted relationship, with important implications for the country's economy and financial stability. Changes in the prices of key commodity exports, such as copper, ferroalloys, and wine, can have a direct impact on Georgia's foreign exchange earnings and the Lari's value, while fluctuations in oil prices can affect the currency indirectly through their impact on major trading partners.

Monetary policy and exchange rate risk management also play a crucial role in navigating the challenges and opportunities created by commodity price movements. The National Bank of Georgia must carefully balance the need to maintain price stability with the goal of supporting economic growth, using interest rates and other policy tools to respond to changing economic conditions.

In the long run, however, Georgia may need to focus on diversifying its economy and reducing its dependence on commodity exports to build greater resilience and stability. By investing in new industries, expanding trade ties, and promoting regional integration, Georgia can create a more sustainable and inclusive growth model that is less vulnerable to the ups and downs of global commodity markets.

As Georgia continues to navigate the complex relationship between its currency and commodity prices, policymakers, businesses, and individuals will need to stay informed and adapt to the changing economic landscape. By understanding the key drivers and implications of this correlation, they can make more informed decisions and contribute to the long-term health and prosperity of the Georgian economy.