The FINANCIAL — The CEO of Dutch Development Bank (FMO) has successfully assessed its cooperation with Georgia and has expressed readiness to support the Government of Georgia to increase the share of SMEs in the GDP and also support alternative banking and financial institutions in Georgia to maximize access to capital. The FINANCIAL talked to Peter van Mierlo, Dutch Development Bank CEO, who has visited Georgia last week.
Q. What is the main purpose of your visit to Tbilisi?
A. In July of this year I was appointed CEO of the Dutch development bank FMO. I consider it important to visit our clients and partners in the countries where we operate. That’s how I can increase my understanding of their needs and the context in which they operate and to collaboratively develop opportunities.
FMO invests in growth and frontier markets, supporting jobs and income generation, and improving people’s lives in those parts of the world where this makes the biggest difference. We invest in key sectors and regions that are crucial to economic and social progress, using our expertise and networks to support sustainable economic development.
We live in a time of great challenges. The world’s biggest problems stem from climate change and inequality. The way we tackle them will determine our legacy and the future we leave for subsequent generations. Banks, like any other organisation, do not exist to achieve operational targets or meet financial goals. They exist to contribute something of value to the world, to do something for the common good.
Q. What are your investment criteria? Do you have a diversification strategy, by asset class and geography?
A. Since 1970, we have been the driving force behind investments empowering entrepreneurs in emerging markets. We invest with the aim of enhancing local prosperity in places where this is needed most. We focus on sectors which are key sectors for development; financial institutions, renewable energy and agribusiness, food and water.
Investing in local prosperity also means that we support our clients with the aim of having a positive impact on local stakeholders, their communities, and ultimately society at large. That’s why we challenge businesses to meet high international standards regarding the welfare of people, corporate governance and the environment.
Q. What about Georgia specifically? What has changed since you first entered the region? Roughly what percentage of your portfolio do you generally allocate to Georgia? How has this changed in recent years?
A. Georgia has experienced strong economic growth since the mid-2000s, supported by its joining of the European Union’s Free Trade Area in 2014. Also, the World Bank has consistently placed Georgia in the top rankings of its ‘Ease of Doing Business Index.’ Due to its mountainous topography and abundance of rivers, Georgia also has the potential for a large expansion in its hydropower renewable energy capacity.
This is my first visit to your beautiful country, so I can’t speak from personal experience regarding how the country has developed. In the past couple of years Georgia has emerged to become one of the most important markets for FMO. It is now the fourth exposure in our total portfolio.
Q. What would be the average size of a commitment that you make to a fund? What are the key characteristics of the best emerging markets fund managers?
A. The size of commitments differs widely, depending on many factors like the size of the fund, co-investors etc.
The best emerging markets fund managers typically have a long-term vision and solid understanding of the volatility and specific dynamics of investing in emerging markets. For example, higher oil prices, dollar appreciation, trade tensions and geopolitical conflict.
For us, it is very important that the fund managers we cooperate with share the same values and conviction that we have in terms of environmental and social impacts stemming from financial investments. Not purely in terms of compliance, but also in really improving things.
Q. Does Georgia differ from other emerging markets?
A. Georgia’s international orientation, sound leadership and willingness and capability to embrace new concepts are factors that contribute highly to the success of the country – not only in the region, but also beyond its borders. The economic prospects for the country look bright. The main challenge is how to sustainably develop the growing agricultural and tourism sector.
Regarding local capital market development, it is noteworthy that in August of this year, FMO listed its first time ever GEL-denominated bond in Georgia, backing the de-dollarization of its economy. By arranging this Georgian Lari loan to a leading local financial institution like Bank of Georgia, we are contributing to the reduction of the economy’s overall dependence on external US Dollar funding.
Q. What data do you use to benchmark returns in Georgia? Would the availability of better data make you more willing to allocate capital to the region?
A. Quality of data is crucial for determining the impact of our investments. As said, we not only look at the financial return of our investments. Banks, like any other organisation, do not exist only to achieve operational targets or to meet financial goals. They exist to contribute something of value to the world, to do the right thing for the common good.
Inequality and climate change are the two most pressing challenges of our time. Without taxonomy, without universally agreed upon definitions, we will not be able to measure our progress in these areas. There are many approaches out there. There are national reporting standards for some SDGs and the UN recently suggested ways that corporations should report progress on the 17 SDGs.
My concern is that with such a broad range of approaches, it will be hard for all of us. I think we can achieve so much more if we work from a single, globally accepted set of definitions, standards and reporting rules. There are probably about 25 truly relevant stakeholders within this discussion based on their role and size, such as the UN, the World Bank and the Global Impact Investing Network. I would like to call upon these institutions to join forces and propose International Impact Reporting Standards IIRS next to the existing IFRS. We need to get this done quickly.
Q. What are the modern challenges of the micro-financial sector in the world and in particular in Georgia?
A. The Georgian financial system can be divided into three blocks. First of all, the two big banks: TBC Bank and Bank of Georgia. Second, there are approximately eight smaller banks, and third is the microfinance sector, with Crystal ranking in first place. For the further development of the financial system in Georgia, it is important to reduce the dependence on the US Dollar.
Recent market developments show how vulnerable banks and companies in emerging countries are when their liabilities are in dollars. By issuing local currency bonds, local savings or offshore investors can be tapped. In both cases, this leads to a much needed de-dollarization of the local economy which creates more stability and stimulates economic growth and job creation.
Q. Depending on the situation of Georgia, how appropriate do you consider it that banks charge quite a high percentage on different types of loans? In many European countries, banks are giving out loans at 2%. Here in Georgia it’s more than 20%. From your point of view, when do you think this situation will change?
A. The level of interest rates is determined by many circumstances. Local and international money and capital markets, but also factors such as how big are the loans and how are they provided? Microfinance institutions have to consider the fact that they provide mostly small amounts of money to a large number of people on a less cost-effective basis. But as the system becomes more efficient, you can see interest rates come down and loan terms lengthen, microfinance loans become economically attractive to a wider range of businesses and support longer term investments.
I think new technology such as artificial intelligence, quantum computing, data analytics, robotics, drones and blockchain will contribute to quality and financial inclusion. These technologies have the potential to change the fortunes of developing countries. They will influence the way we in the finance industry do business and how we evaluate clients’ business cases. Frontier technologies hold the promise of prosperity without all the investments that will become obsolete in the Western world as we know it.
Dutch development bank, FMO invests in over 85 countries, supporting jobs and income generation in order to improve people’s lives in the parts of the world where it is possible to make the biggest difference. FMO’s role extends beyond financing, as it helps businesses to operate and and grow transparently in an environmentally and socially responsible manner.
Eva Bolkvadze, The FINANCIAL