Short-term liquidity forecasting method

    The liquidity forecasting involves an analysis of the changes in the key factors of the NBG balance sheet influencing the banking system liquidity. The liquidity forecast group estimates the demand on liquidity from the banking sector and the autonomous supply of liquidity. Based on the estimated gap, NBG will either withdraw or inject appropriate level of liquidity.

     

    The autonomous factors affecting the supply of liquidity are derived from the NBG balance sheet and consist of the following items:

    • a)  Net foreign assets
    • b)  Net government position with the NBG
    • c)  Currency in circulation
    • d)  Other net assets.

     

    Reserves supplied by NBG should be considered as well. These reserves are determined according to the open market operations (OMO) and loans supplied by NBG.

    The methodology to evaluate factors effecting the autonomous supply of liquidity and demand for reserves is described below.

     

    Components of liquidity supply

     

    The change in the net foreign assets of the NBG is determined by the NBG FX interventions and the settlement of other FX transactions and can therefore be forecasted. Buying the foreign currency causes growth of the foreign money aggregates, which increases the liquidity; In case of sale, foreign currency liquidity decreases.

     

    Net government position with the NBG which refers to state revenues and expenditures is the most important source of changes in the autonomous liquidity supply. The treasury data, namely the weekly forecasts about the revenues and expenditures, is mostly used by NBG. Based on these data, NBG calculates average daily revenues and expenditures for the forecast period. Government revenues and expenditures display the seasonality pattern for particular dates (for instance, pension distribution dates, deadlines for paying taxes). For instance, distribution of pension, which takes place around the date 10-11 of the month, increases government expenditures that in turn results in rapid growth in liquidity. Currency in circulation will increase in the subsequent days that has the opposite impact on liquidity.

     

    Currency in circulation is another important component of autonomous liquidity supply. Increase in the demand for currency is followed by decreases in liquidity and vice versa. In the short run the demand for currency is primarily affected by recurring seasonal factors such as payroll dates, pensions and allowances, weekends and holidays. These factors are considered in the process of short-term liquidity forecast.

     

    Time series model (ARIMA) is the alternative approach for the projection of currency demand. However, high level of dollarization of Georgia's economy creates some disorder in accurate estimation.

     

    Other net assets contain changes in the NBG's capital and reserve funds and revaluation reserves. Predicting this component is relatively straightforward since these changes are either known in advance or they do not affect the supply of liquidity

     

    As much as OMOs have an influence on the supply of banking reserves they should be considered in the liquidity forecast. Open Market operations are conducted by the National Bank of Georgia. The date of auction and nominal volume of emission are known in advance. The information about the volume of redemption is obtained from the data of past auctions. Issuance of securities decreases liquidity in the system, while the redemption at maturity increases it.

     

    Components of liquidity demand

     

    Demand on the required reserves doesn't require forecasting in Georgia. The volume of the demand for required reserves is known to the NBG, since the new reserve maintenance period starts two weeks after the end of the required reserves calculation period. 

     

    The demand for excess reserves is deemed to be equal to zero under moderately high required reserves.

     

    The supply of bank reserves is determined as follows:

     

    Supply of bank reserves = Net Foreign Assets + Net Government Position+ Other Net Assets - Currency in Circulation+ Open Market Operations+ NBG loans.

     

    Liquidity demand is determined according to the demand on the required and excess reserves. The demand on excess reserves equals to zero.

     

    If the demand on bank reserves exceeds the supply, NBG will compensate this imbalance by offering the refinancing loans, which increases the supply of reserves.

     

    Assets

     

    Liabilities

     

    Autonomous factors of liquidity

     

    Autonomous factors of liquidity

     

        Net Foreign Assets     

    -

        Currency in circulation 

    +

        Domestic assets (government, economy, other.) 

    -

        Government deposits  

    +

    Monetary policy instruments

     

    Monetary policy instruments

     

        Refinancing loans

     

        Correspondent accounts

     

        One-month open market operations 

     

        Overnight deposits 

     

        Overnight loans

     

        Certificates of Deposits (CDs)

     

     

    ‘-‘ decrease in demand for liqudity
    ‘+‘ increase in demand for liqudity