Georgia’s Capital Markets Poised to Blossom

Georgia’s economy has grown robustly over the past decade, despite the global financial crisis of 2008-9 and the regional headwinds of 2014. Deep economic reforms have earned the country a reputation as a star reformer, securing 6th place in the World Bank Group’s Doing Business 2019 Report, which assesses the ease of doing business in 190 countries. This is the highest ranking for an emerging-markets economy.

Georgia has one of the most developed banking sectors in Eastern Europe. Leading banks operate at international standards. The country’s two largest banks are listed on the London Stock Exchange. Yet access to financing remains a major obstacle for businesses, according to the World Economic Forum’s Global Competitiveness Index 2017-2018.

So, what can businesses do to expand their sources of financing? One solution is to tap into savings through capital markets by issuing bonds. This is what other emerging-market economies have begun to do. Unfortunately, this has been easier said than done and Georgia’s capital markets have been developing relatively slowly.

But that situation is now changing—thanks to a series of bold, pro-market and governance reforms, and improvement of the tax regime and enhancement of transparency and accountability. As demand for funding increases, capital markets are expected to develop rapidly over the next few years, particularly with real GDP growth in Georgia projected to average around 5.2 percent in 2018 and 2023 (Source: IMF’s World Economic Outlook, October 2018).

This is important for Georgian businesses. It is also important for Georgia’s economy—which is why the development of capital markets is now high on the government’s agenda, and the National Bank of Georgia is playing an active role in the process.

Good corporate governance is also gaining relevance, with increasing research suggesting that companies with robust governance structures tend to perform better financially, and investors are starting to take notice.

The European Union’s Association Agreement with Georgia, which came into force in 2016, requires fundamental changes to the legislative base for Georgian capital markets. Starting in January 2018, Georgia’s tax code introduced tax benefits for bond investors to encourage participation.

In 2019, the government will also start implementing pension reforms—to bolster the accumulation of savings outside the banking sector and boost demand for bonds issued by Georgian corporations. This can help create alternative savings and new sources of liquidity. The pension reform is expected to promote domestic savings and create an institutional investor base for long-term Lari-denominated assets.

All this is crucial for the country’s economy. World Bank Group research has revealed that emerging-market countries with robust domestic capital markets are better able to manage financial crises, avert major economic dislocations, and help firms and citizens maintain financial solvency. In other words, well-developed capital markets serve as additional support to enhance stability of the financial system.

But what are the advantages at the company level?

Debt capital markets provide an alternative source of funding for corporates, while also giving investors the flexibility to sell in the secondary market ahead of maturity. Issuers can typically achieve longer tenors and larger funding amounts through capital markets than in the conventional loan market. In addition to financial benefits, corporates also gain much more visibility. In Georgia for example, by requiring a credit rating for a domestic issue, the regulator has encouraged issuers to seek credit ratings from international credit rating agencies. Going through the comprehensive rating process means more transparency for the investors and more visibility for the issuers.

Georgian companies indeed have recently started to be rated by Fitch Ratings, which has already evaluated several large Georgian companies. Some firms have even gained access to international trading platforms.

International financial institutions can help strengthen investor confidence by participating in bond issuances, especially early on in the process. For example, in 2017, my organization—the International Finance Corporation—was the sole anchor investor for the first offshore Lari-denominated bond issued by a Georgian corporation (Bank of Georgia). This was the first international local-currency bond issued by any corporation from the wider Commonwealth of Independent States (CIS) region, except for Russia, since 2008.

The issuance helped crowd-in 500 million Lari (approximately $207 million at that time) from international investors in long-term local-currency finance for businesses. It also helped in the development of a local-currency market, advancing the country’s “de-dollarization” efforts and raising the Bank of Georgia’s profile in the capital market.

Over the past few years we have seen fundamental changes in the market, more and more companies are coming to the debt capital markets to raise funding. National Bank of Georgia accepts corporate bonds as eligible collateral for rated issuances. This presents a huge opportunity, as such issuances become more attractive for banks as investors. In addition, pension reform will trigger accumulation of savings outside of the banking sector which can also create demand for corporate issuances.

Georgia can further advance the growth of domestic capital markets by becoming a regional financial hub and attracting international savings and international issuers to take advantage of the transparent and investor friendly environment. This would also align with its ambition of becoming a regional logistics hub, leveraging its favorable geographical location, as a gateway to the Caucasus and Central Asia.

There is a sound logic for this, given that Georgia has historically always acted as a trading center for the Caucasus region. The country still has a way to go to become a mature capital market—not just for debt but also for equity. But the country is off to an excellent start.

By Georgina Baker

Georgina Baker is Vice President for Latin America & the Caribbean and Europe & Central Asia at IFC, a member of the World Bank Group. IFC is the largest global development institution focused on the private sector in developing countries.