Term deposit in GEL, a good idea?

Hello,
I’m interested in doing a term deposit in GEL (by converting my USD -> GEL with Transferwise) as the interest rates can be as high as 10% (https://www.tbcbank.ge/web/en/web/guest/term-deposit). Thing is I’m a bit afraid of converting a big sum of money in foreign currency for the sake of investment. I’m telling myself that if the GEL goes down when I convert my money back to USD at the end of the term deposit, the 10% interest rate will still compensate for the eventual loss in value.
I’m far from being an expert on that. What would you guys do/recommend? Thank you.

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If a meteor were to hit wall street, now it’s time to buy ruble with7% interest instead of GEL. :star_struck:

In basic economy, bank inerest could not overcome inflation. If you keep longer you loose more and have to work more. Think of it, if you get much that drives your bank into bankrupcy, non? :rofl:

Nontheless, you love interest, you have a chance to go to myanmer and buy high interest USD deposit with no insurance in major banks. :earth_asia:

In general, major forex company gives you a better chance than bank, even though most of investers can not help to be loser after gambling. :hole:

Well I’d say it depends on the type of accounts you have, in the case of saving accounts I agree. But in the case of term deposit it means your money is blocked/own by the bank for them to invest it wherever they want. From here if you look at the rate for loans in Georgia they are hovering around 15% (yeah that’s right, 15% when in France it’s under 1%). So from here one may think (I mean me) that during this 24 months period the bank would lend my money to someone contracting a 15% loan,
give me 10% of it and then they keep the rest for them.
Ofc this is an oversimplified picture of what may happen and it’s by no mean correct.

TBC bank also offers a 3.85% (minus 0.5% for foreigners) term deposit in USD for a 24 month period. I don’t know any bank in the US offering such a deal and this lead me to think that’s there is something more than just inflation behind this.

You should also take into account the relationship between exchange rates and interest. Read a bit about interest rate parity. Also note that the value of a currency is very sensitive to changes in interest rates. Right now the interest rate of the GEL is high, meaning if it drops (even a little) it is likely to be worth less when you exchange back to USD.

Take this article from Andrew Henderson where he claims to make 17% risk free (there’s no such thing) interest on a 12 month GEL term deposit as an example.

The interest rate he gets on the deposit is actually 10.7%—still not bad, right? Better than what you would get today.

He writes that article 3 months into his experiment, and the exchange rate has improved a little since he signed the term deposit contract. So he says it’s even better—given the then current exchange rate he is looking at a 17% return on investment when converting back to USD 9 months later.

But as they say, don’t count your chickens before they hatch.

He made his investment at an exchange rate of 2.37 GEL/USD. Well, what was the actual rate 9 months after that article was published (at the end of his term deposit)? 2.699 GEL/USD.

That means the Lari actually lost 13.88% against the dollar during the year of his investment. So he didn’t gain 17%—instead he lost 2.79%.

Actually, he lost more than that when you factor in the opportunity cost—he could have have placed the USD in a term deposit instead (in Georgia or elsewhere) and earned at least an extra few %.

I don’t mean to diss Andrew by using him as an example (it’s just the first example I found). My point is that this sort of thing can happen to anyone (I’ve also made similar mistakes in the past), and that there’s no (risk-)free lunch to be had. Do yourself a favor: forget anything you think you know about future exchange rates.

I’m not saying that you won’t make a killing on your GEL deposits (you very well might). But it’s not a risk-free investment.

Perhaps the USD term deposit is safer? It’s about ~3.28% effective, before taking into account transaction costs—like flying to Georgia to open an account, paying SWIFT network fees, etc. It’s above the the 1.736% yield of a 24 month US treasury bond, but of course it should be. Who do you think it’s more risky to lend to, a Georgian bank or Uncle Sam?

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Thanks a lot for this detailed explanation! As for the USD deposit, I already have a bank account at TBC bank and unfortunately, I couldn’t find a way to get a bank account in Uncle Sam’s country :frowning:. I’m not a US person but I get paid in USD that I split between Transferwise/TBC because I don’t have much of a choice (I know people would say it’s risky but if they have other solutions I’m all ears). And indeed there are some international fees with TBC bank (0.2% for outgoing transfers and even incoming transfer have hidden fees because of the intermediary banks, but I have no choice here). I tried to contact TD bank to know if I could open a checking/saving account there but they didn’t seem to understand that I wanted to open the account in the US, moreover, they don’t have any branches in CA :frowning: .

So I think from here if I want to take a “not so risky path” it would be to just make a term deposit in USD at 3.28%. Thanks a lot @tkrunning , you’re really knowledgable on the subject :pray:

Hello!
A slightly different approach that may help offset potential risk of GEL deprecation:

  1. Invest in GEL @ 10% for say 1 yr.
  2. In forex, go long USD against GEL by a proportionate amount by buying a long term Call expiring a year from now. Or buy lesser priced monthly or quarterly Calls (Consider premium you pay as insurance to reduce impact of loss.)
    You should be OK whichever way GEL moves unless by a huge %age.
    The best!

If you understand what economy you are involved in, the answer is simple. The essence of capitalism is stock market.
In the past twenty years, stock market gave 8.2% return. Bonds 2.x%.
So 10% return is quite possible or easy in stock market in USD. Average invester got 15%, and smart got at least 20 to several 100% and more.
I am not sure GEL shows strong outperform. In economy, interest correlates with inflation not with development.