The FINANCIAL — The European Bank for Reconstruction and Development invested 71.9 million EUR in Georgia’s financial sector in 2010, two fifths of the portfolio is in the financial sector.
The FINANCIAL — The European Bank for Reconstruction and Development invested 71.9 million EUR in Georgia’s financial sector in 2010, two fifths of the portfolio is in the financial sector. EBRD hopes to invest a similar amount to the 2010 figure and maybe even more in Georgia’s financial sector according to Paul-Henri Forestier, EBRD Director for the Caucasus, Moldova & Belarus.
Since the beginning of its operations in Georgia, EBRD has committed over 1 billion EUR in approximately 129 projects in the financial, corporate, infrastructure and energy sectors.
The main projects for 2010 at EBRD were: Black Sea Transmission Line (80 million EUR), Tbilisi Railway Bypass (100 million EUR), Poti Port (8 million EUR), Enguri Hydro Plant Rehabilitation (20 million EUR), and Adjara Solid Waste Project (3 million EUR).
The key areas for EBRD include industry, commerce and agribusiness, energy, financial institutions and infrastructure.
In the financial sector EBRD’s key priority is to support the stability of the financial banking sector in particular. The Bank’s focus will be on ensuring adequate levels of capital and supporting the resumption of lending by existing clients in the financial sector.
Moreover, the Bank will support rehabilitation, construction and expansion investments in the power sector that will help Georgia achieve security of energy supply while facilitating trading of electricity in the region. Strong emphasis will be put on supporting the enterprise sector.
“Like many other emerging countries, Georgia has also suffered from the global financial crisis. EBRD’s main priorities for Georgia, since the crisis, were, largely to support the financial sector to remain liquid, with loans as well as with credit lines to be extended to the real sector of the economy. Developing the enterprises sector remains the backbone of a healthy economy,” Forestier told The FINANCIAL.
“The Bank continuously focuses on developing the private sector in Georgia addressing critical bottlenecks to local private sector investment and foreign direct investment. In the financial sector, in addition to expanding its support to existing and new partner banks in Georgia, EBRD will assist in developing the non-bank financial sector with a specific focus on leasing, insurance and private pension schemes,” Forestier said.
To the question how would he evaluate the performance of the Georgian banking sector, Mr. Forestier said “Georgian banks have generally restored their confidence in lending and currently have good liquidity.”
Q. Which banks are mainly financed by EBRD in Georgia and what was the main decision in choosing these banks?
A. We deal with the majority of the leading banks as well as with medium/small ones measured by assets, covering 85% of the whole banking industry. We also work with two non-bank financial institutions – Imedi L insurance company and TBC Leasing.
The Bank primarily focuses its investments on projects that meet the key criteria of sound banking, additionality and transition impact. EBRD also seeks to promote the development of financial markets and contribute to financial stability. A healthy, efficient and stable financial sector remains the cornerstone of a market economy.
Q. In the financial sector, EBRD will expand support to existing and new partner banks in Georgia, as well as developing the non-bank financial sector with a specific focus on leasing, insurance and private pension schemes. Currently, how would you evaluate the development stage of the non-bank financial sector?
A. A range of banks and specialist institutions offer micro finance. Bank lending to the MSME sector has increased with the rapid growth of ProCredit Bank contributing to a significant competitive pressure in this segment of the market. Nevertheless, only some financial intermediaries have developed sustainable MSME lending, and there is still a big gap in further development of the Micro finance Organizations in Georgia.
The insurance market remains relatively small (with a premia-to-GDP ratio of less than 1%), and the legislation and regulation fall short of the IAIS standards. The scale of private pension funds operations is very limited. Leasing operations are being gradually developed but from a very low base with only three leasing companies operating in the market.
EBRD will expand its support to developing the non-bank financial sector with a specific focus on leasing, insurance and private pension schemes.
Q. Georgia is the most anti-corrupt state in Europe, European Bank for Reconstruction and Development (EBRD) Vice President Jan Fischer declared in Kiev. In your opinion, what other factors might be attractive for foreign investors?
A. Recent developments of the country are as follows. The Government’s extensive reform agenda, with its focus on improving the business environment, has already achieved important results since implementation began in 2009. The World Bank’s Doing Business 2010 survey ranked Georgia 11th out of 183 countries by its composite ease-of-doing business measure, a further improvement on the country’s 16th position a year earlier. Its ratings in both paying taxes and trading across borders exhibited especially large improvements, reflecting the progress with reforms in these areas. Georgia also moved up slightly in the Transparency International Corruption Perception’s Index for 2009 to 66th globally, a level above any CIS country by a wide margin.
The Government has continued to further simplify and streamline the tax system, building on the changes implemented in 2009. These eliminated the tax on dividends from publicly traded enterprises, on interest income from bank deposits and on capital gains. The 2010 reforms, to be implemented in 2011, are set to introduce a number of tax breaks for micro and small businesses, including the elimination of profit tax on small businesses, provided they submit relevant accounting documentation. These reforms should help reduce the size of the shadow economy. To further reduce corruption, the new tax code will establish a board of auditors to supervise the tax inspectors. At the same time, the previously foreseen decrease in income taxes will be delayed in order to satisfy budget revenue requirements.
The Government is creating a supportive environment for the development of the country’s nascent information technology (IT) sector. IT use in Georgia is already growing rapidly, as evidenced by the almost 50% increase in the number of broadband users in 2009. By 2011 the authorities plan to implement a bill on the creation of virtual IT zones, with significantly faster issuance of relevant licenses. However, the exemption of companies operating in the zones from all taxes and customs duties may complicate tax administration.
The National Bank of Georgia (NBG) introduced new measures and policy instruments in 2010 designed to increase the effectiveness of monetary policy in a heavily dollarised financial system. Among these measures, which the NBG hoped would also boost GEL lending, were guaranteed refinancing instruments with variable interest rates and an expansion of the range of collateral, which can be used to tap central bank refinancing. The measures had a limited impact on reducing dollarisation, however. Ongoing efforts to build capacity to adopt a credible inflation targeting regime should help build confidence in the ability of the NBG to maintain price stability and, consequently, in GEL. Combined with further strengthening of prudential policies and deepening of the local capital market, these policies would help reduce dollarisation over time.
Q. In your opinion, what strategies should Georgia follow and which sectors should be further developed to make Georgia more economically attractive for investors?
A. The main challenge for Georgia is to attract private investment after the crisis. There is considerable uncertainty about the future pace of foreign direct investment (FDI) inflows – a key driver of pre-crisis growth. Therefore, it is important for the authorities to focus on structural reforms to encourage domestic savings and investment.
Further reforms are required in the financial sector to ensure continued recovery from the crisis and stable growth in the longer run. A credible shift of the monetary policy framework to inflation targeting, further strengthening of prudential policies and deepening of the local capital market are the key issues. Over time, these policies should help reduce dollarisation of the banking system. Although the Government has pursued fiscal consolidation in 2010, the overall deficit remains high and public debt has yet to stabilize.
It will be important for the Government to make a credible commitment to implementing a responsible fiscal policy in the future to support a recovery of market confidence.
Q. EBRD is supporting the rehabilitation and expansion of the electricity distribution network in Tbilisi with a 25 million USD loan to Telasi. In your opinion, what is the potential of energy sector development and which projects will be financed under the 25 million USD loan?
A. EBRD extended 25 million USD to JSC Telasi to finance the company’s investment needs for 2010 and 2011. Telasi’s investment programme principally consists of the rehabilitation and expansion of its medium and low voltage network and the buildings and equipment at its substations as well as the introduction of a SCADA system (supervisory control and data acquisition) at medium voltage substations’ level to enable remote monitoring over the network. The main purpose of these investments is to improve the quality and reliability of supply and reduce losses in the distribution network.
Development of the energy sector in Georgia will offer Georgia an alternative source of electricity supply and substantially contribute to security of supply. Georgia has huge potential for energy resources, mostly from renewable energy. The Government’s key strategic objectives also are: i) increase energy security; ii) increase the reliability and quality of electricity supply in Georgia; iii) increase electricity trade in the Caucasus through the creation of an electricity hub for energy exchanges with neighboring countries (i.e. Turkey, Armenia and Azerbaijan).
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