One-page summary: Which currencies should large businesses borrow in?
TBC Capital has released a new set of recommendations outlining an optimal foreign currency strategy for large businesses seeking financing.
While one-page summaries are not typically favored by researchers, the company notes that this format was chosen in response to strong demand. The publication aims to facilitate the more practical and widespread adoption of TBC Capital’s framework for optimizing currency structures in corporate borrowing.
When determining the optimal loan structure, businesses should first assess the currency in which they are effectively hedged. In this context, hedging refers to protection against foreign exchange risk—meaning that fluctuations in exchange rates do not materially impact a company’s financial performance.
Hedging levels vary significantly across industries. For example, in Georgia, the price of new cars is almost entirely denominated in foreign currency, whereas residential real estate prices—contrary to prevailing market perception—are largely denominated in Georgian lari.
Key factors to consider in a currency strategy include:
- Diversification: According to TBC Capital research, a multi-currency basket (USD–EUR–CNY) can be equivalent to approximately 40% in real lari terms, while significantly reducing costs.
- Enhanced borrowing capacity: A well-hedged debt structure allows companies to take on more debt and achieve higher profitability—even without stress scenarios.
- Currency composition of key trading partners
- Business cyclicality: Contrary to current practice, cyclical sectors should have a higher share of borrowing in lari.
- Sales sensitivity to exchange rate fluctuations
- Non-linear exchange rate pass-through effects, which can reduce currency risk more effectively than simply increasing the share of lari
- Interest rate differentials: Important, but should not be overemphasized as is often the case
- Conversion costs
- Export markets
- Assessment of the equilibrium level of the lari, including short- and long-term forecasts and episodes of over-appreciation, as highlighted in 2023
- EUR/USD equilibrium analysis: Whether it is advisable to borrow in currencies that tend to strengthen during stress periods, and how relevant the so-called “dollar smile” theory remains today
The report also examines recent developments, including the strengthening of the US dollar following escalation in the Middle East—questioning whether this reflects its renewed safe-haven status, the US position as a net oil exporter, or rising interest rate expectations driven by inflation.
Additionally, the publication evaluates the EUR/USD equilibrium in the Georgian context, addressing which currency the lari is more stable against—the euro or the US dollar.
TBC Capital emphasizes that even by applying just one component of its framework—exchange rate equilibrium assessment and forecasting—Georgia’s corporate sector could have generated a cumulative benefit of GEL 6.3 billion over the past five years, compared to an average corporate loan portfolio of GEL 16.9 billion during the same period.
Further details, including practical illustrations of currency strategies based on selected case scenarios, are available in the full publication.
In conclusion, TBC Capital highlights that the framework, first introduced in 2019, is gaining broader adoption. The company continues to develop tailored approaches for individual businesses and expresses its appreciation to partners while reaffirming its readiness for further collaboration.
Read the full report here.
