Andrew Wrobel (AW): The Georgian financial market started evolving in 2009. What triggered that evolution?
Otar Sharikadze (OS): In reality, the market has been developing since 2014. Then, to spur the development of the International Finance Institution (IFI) bond market, the National Bank of Georgia (NGB) established a list of “acceptable” IFI issuers (mainly AAA-rated institutions) who could issue bonds in Georgian lari, simplified IFI bond issuance procedures, and made these bonds eligible for repo transactions.
Largely as a result of these measures, since 2014, the Asian Development Bank, the European Bank for Reconstruction and Development, the International Finance Corporation and Black Sea Development Bank have issued 10 lari-denominated bonds totalling around 724 million lari. Government support has also been reflected in the corporate bond market. Since January 2014, there have been 21 successful offerings of corporate bonds, totalling approximately 230 million US dollars, of which nine placements were in the national currency.
Another major milestone which triggered this new era was the NBG’s decision to allow issuance of securities and payment of coupons in foreign currency. This was an important message for investors. In 2014, due to the high dollarisation rate of the Georgian economy investors preferred to invest in US dollars. Decreasing rates on US dollar deposits also positively impacted the development of the corporate bond market, creating an incentive for investors to search for alternative dollar investments. The third and most important factor was the readiness of a number of big Georgian corporates to diversify their financing sources through bond issuances.
AW: So where do you see the capital market now? What are the bottlenecks?
OS: The key direction to be developed is local currency-denominated bonds, which are more favourable for Georgian companies with revenues in lari. There is significant demand for lari financing on the market. Up until now, most of the lari financing was completed through bank loans at high interest rates.
In 2016, the NBG established a set of regulations aimed at supporting lari bond market development. These regulations enable banks to use lari corporate bonds (these issuers should have a rating from at least one international rating agency) as collateral for repo transactions. Eligibility for repo transactions gives a significant boost to lari bond market development, enabling commercial banks to use lari bonds as a liquidity management instrument and incentivising them to become active investors on this market. Furthermore, companies can benefit from alternative lari funding, which enables them to reduce their exposure to foreign currency risk.
Moreover, since January 2018 there is a new tax regime concerning public equity or bonds. Investors will not pay capital gains tax. Moreover, interest tax will be zero until 2023. The only tax that remains on equity is dividend tax of 5 per cent.
As for bottlenecks, I see this more from the supply side rather than the demand side. Issuers need time to get ready to tap capital markets. In the case of lari bonds they also require an international rating. However, from our experience, once one bond has been issued, more tend to follow.
AW: What regulations do you think should be introduced to foster further development?
OS: This year we expect the introduction of a few reforms that will boost capital market development: a new law regulating investment funds in quarter two, then another on securitisation in quarter three and a pension reform in quarter four.
AW: Do you see potential for equity capital markets development?
OS: Yes, and there are a certain number of reasons for this. On the issuer side – they are quite leveraged and understand that the only way for growth is raising capital. We are in discussion with a number of issuers who plan to tap capital markets to raise equity. On the investor side – a number of local and foreign investors are willing to take equity risks.
AW: How do you see the capital markets in the Caucasus region and do you think that Georgia could act as a regional financial hub?
OS: I do believe that Georgia could and should strive to become a regional financial service hub for the region. Historically Georgia has always acted as a trading centre for the Caucasus region.
Today, Georgia has a leading position in various international rankings, such as 9th position in easy of doing business 2018 by World Bank and 19th position in economic freedom index by heritage foundation. If the government continues implementing pro-business regulations and supporting capital market development in Georgia, we could become a financial service hub for the region.
Throughout history, Georgia has proven to be a place where foreign institutional investors are welcome. Georgia and leading Georgian corporates have been actively issuing Eurobonds that have been successfully subscribed by international investors. Last year investors subscribed Bank of Georgia’s first ever lari denominated 500 million Eurobond. This was a significant milestone for the country, when international investors bought lari risk. Moreover, there are already three Georgian companies successfully trading on the London Stock Exchange. Two of them have been included in the FTSE 250 index.
I think that the regulations which will be implemented next year will strengthen Georgia’s position as a financial service hub and I hope that in coming years we could see a number of Azeri and Armenian companies willing to issue bonds in Georgia.