The FINANCIAL -- Creating
the right policies for restoring GDP growth, local currency lending to
help SMEs, maximizing energy and the logistic potential of the country
to make Georgia a hub, more clarity on the economic programmes of the
Government for improving the investment climate in the country - these
are the major steps that EBRD intends to take together with the Georgian
Government from September 2013.
As a result, overall economic conditions will be improved in Georgia, believes Sir Suma Chakrabarti, President of the European Bank for Reconstruction and Development.
“The Georgian economy was worsening but I see that it is going to start improving soon. It worsened as much as it did in other countries. Certainly, if we look at Central Europe or Eastern Europe’s growth, the economy’s growth is slower there. In some countries there is only 1 percent growth. So it is pretty good to have 3 percent growth in Georgia. Having said that, we should acknowledge that it is still slow compared to what Georgia is able to achieve,” Sir Suma Chakrabarti told The FINANCIAL.
Q. Could you please summarise the Georgian economy in just a few words? In your opinion, what were the main reasons for the economic slowdown in the country?
A. EBRD forecasted 3 percent growth for Georgia this year. And the current projection is 6 percent growth next year. 3 percent growth compared with most of our countries’ operations (we have 35 country operations and Georgia is one of them), means that Georgia is experiencing a better growth rate this year we think. Georgia, like every country, has been affected by the global economic slowdown, also the regional economy - Russia and Turkey, have experienced a slowdown as well. Taking into consideration all of these facts, I think that 3 percent growth is pretty good. We really have to access the Russian market much more, really try to attract investors quickly.
There was too much blame laid on the elections in Georgia as the main reason for the economic slowdown in the country. I think, however, that it is much more a global reason. The economic crisis globally was the main reason for the Georgian economic slowdown. Russia, Ukraine , and Turkey - all of them also went down in terms of economic growth. Of course the elections can have some influence on economic growth but again, that is not true for Georgia. In every democratic country there is a transition period and this is a normal part of democracy.
Q. How can EBRD help Georgia to restore GDP growth?
A. Fundamentally, in any country GDP growth depends on getting the level of investment up, getting good investment. EBRD’s role is to try and help Georgia to push private sector investments and to flow foreign direct investments into Georgia as this had slowed down. One of the things that also really helps GDP growth is to have the right policies in place. Implementing projects is our main work but we also provide policy advice to governments on how to attract foreign investments and investors to the country.
EBRD has already designed its strategy for how exactly it is going to help Georgia in growing GDP, FDI and other things. The strategy will begin to work from September. We will have three very important steps to take to grow the economy. The first thing is to really help the SMEs much more. I think that banks are in a very good shape here. One of the things that SMEs have been lacking is access to local currency. They want to borrow in the local currency. EBRD will agree with the banks in Georgia to issue bonds in the local currency. We think that local currency lending will help local SMEs.
The second priority is the energy sector. We all know that Georgia does not have local oil and gas. But what it does have is an extremely large amount of water and energy potential. Trying to maximize the energy potential of the country so as to export energy as well as trying to attract foreign direct investments into the country’s hydro projects will be something that we will focus on.
And the third thing which is linked to the above-mentioned point is that Georgia should become a regional economic hub. Obviously in the energy sector it certainly can be. One of the projects that I saw when I arrived in Georgia was a new logistic centre outside the Airport . Georgia should really use that infrastructure; take financial services as well as energy to become more of a regional hub.
These are three concrete things we should be doing to try to help the growth of the economy.
Q. You mentioned that SME development in Georgia is one of the priorities of the EBRD project starting in September. Why have SMEs been less of a priority during the last few years?
A. We did a lot for SMEs in 2012 and spent half of USD 130 million (of the total budget) on that sector in Georgia. There are a number ways that you can help SMEs, but I think that this time we will ask the banks to try to help the SME sector. There are a number of credit lines they can have, energy efficiency credit lines or energy lines for agriculture or for female entrepreneurs.
Sometimes, in some countries we have done direct lending, which is very expensive. If we need to do that in Georgia we will. Actually, in Georgia the non performing loan to MPO rate is quite low for SMEs, much lower here than in other countries. The banks have lent well to the SMEs and perform quite well. The banks should be careful about which SMEs they lend to, because many SMEs fail. I think that in Georgia SMEs involved in energy and agriculture have the potential to grow and not to fail.
“There is no policy against buying shares in local SMEs. If we need to and if we think that that will improve corporate governance enough, then we will do that for sure, but only in the event it is really necessary”
Q. Don’t you think that in Georgia it is necessary exactly now?
A. Maybe it is necessary but the first step is always to try to improve corporate governance. I am completely open to the idea of buying shares in local SMEs. We have done this also in other countries and will do so here as well depending on the situation.
Q. What are the main risks that investors have faced in Georgia so far?
A. I think that one of the main issues is that Georgia needs more clarity on the economic programmes of the Government. We talked to lots of foreign investors and the thing they often say is: “We need more detail”. We have the outlines of speeches made by politicians and in particular by the Prime Minister, but great detail of the priorities and how they can be achieved still needs to be shown. In the discussion with the Prime Minister that was what I said. I said that it is good that you are saying this but you need to lay this out more. He agreed and the good thing is that he asked EBRD to provide some advice on that and we will do that. Clarity is what investors want to see.
Of course it is part of the plan to continue improving the investment climate. Compared to other countries where EBRD is operating Georgia has a much better investment climate but it should always be improving, because other countries will catch up as well. So, another piece of advice is that Georgia should improve its investment climate.
Q. The FINANCIAL spoke with business associations and investors who said that they have lost confidence in Georgia. Statistics show that FDI has dropped significantly. What should be done in order to restore investor confidence?
A. I think that the culture of self reflection is growing over time in this country. Foreign direct investments have reduced everywhere actually, not just in Georgia. The global situation has made a lot of FDI drop significantly. I think that in terms of Georgia there are two reasons: one is the global economy and the second is again the clarity that many foreign investors want. Clarity on where the economy is going, what are the policies that the new government wants to pursue. A clear economic plan, clear priorities, what will the foreign investors and private sector focus on - these are normal requirements from the investors’ side.
Q. Asides from the reason that you have already mentioned, could you name the other concrete reasons which prevent foreigners from investing in Georgia?
A. That would definitely be the court system. To have a better investment climate Georgia has to improve its court system. It takes time in every country but that’s something that everyone knows Georgia needs to improve on. EBRD appreciates that Georgia has already done lots of improvements to create a better investment climate in the country though.
After the court system, commercial code is another important thing that needs attention. Lots of investors look at commercial code in case they have problems with contracts. Georgia should therefore improve on that as well.
Q. Do you think that the recent political changes and questions raised over uncertain foreign orientation could be frightening investors when it comes to making decisions?
A. Most of the foreign investors that we talked to know for sure that Georgia is progressing in the right way, which is towards the European Union. I think that the foreign orientation of Georgia is not uncertain for foreign investors and that should not frighten them when it comes to making decisions. No one has any doubt about Georgia’s course toward the European Union. Foreign investors want to be clearer about what the policy frame will be. As I said earlier, they need clarity about the economic direction of the Government. Investors are not afraid of pro-Russian orientation as they believe Georgia will be a part of the European Union.
Investors are not afraid of pro-Russian orientation as they believe that Georgia will be a part of the European Union