The FINANCIAL — The European Bank for Reconstruction and Development (EBRD) is expecting to invest over USD 450 million throughout 2010 in Georgia’s pipeline, energy, corporate and financial sectors. Olivier Descamps, the EBRD Business Group Director for Southeast Europe, Caucasus and Central Asia, says that currently the financial crisis is transforming to an economic crisis. “We have to realize the total situation of the region. I think that crisis recovery in the region is also going to be slow.”
“As part of the new strategy of EBRD and as part of our loan within the international financial package that was to assist in October last year we are ready to commit four kinds of projects in infrastructure in this coming year. One, that will be done in the first quarter, is to co-finance a significant section of the black sea electric transition line, which we would be looking at up to USD 120 million for funding. KFW and Asian Development Bank will also participate. The second one is the railway bypass Tbilisi, which will be done in the middle of the third quarter and we are talking about a similar amount or more. The third one is that we are going to continue to go to municipality finance which is for environment projects and Adjara will be the next one looked at. And fourth – we will be looking at Poti port, including modernization of the number 14 port and launching USD 12 million,” Descamps told The FINANCIAL.
The purpose of Descamps’ visit was estimation of the crisis’s impact on the banking sector and real economy and also to see the response and country’s strategy, run by the Georgian Government.
Descamps recalled that Georgia has suffered from a double shock. “The effect of the global recession was preceded by the August 2008 war. This explains quite easily why there has been such a very serious banking crisis in the country.”
“Foreign direct investment in the country has been reduced by 80%,” Descamps says. “Direct investments were a major source of economical growth in the past. So Georgian banks basically stopped lending and growth,” Descamps says.
“But there are three things which are very sound in terms of macroeconomics, in terms of stabilization of the banking sector and a new source of international funding. First is the international package of USD 4.5 billion which is working and has been delivered from IMF, World Bank, EBRD, Asian Development Bank, KFW and other donors and that has really been helping the macroeconomics to create some stability and credibility of funding and policy. Second and very importantly is that the Government’s policy of anti crisis and stimulus has been aggressive in the good sense of the meaning of that word. It seems to be well managed and well directed in the segments of the economy which were most affected,” Descamps says.
Before his visit to Georgia, Descamps was in Armenia and met with the Armenian Government.
“My advice to the Government of Armenia was improvement of the investment climate and diversification of the economy as the two most important things to be done in Armenia. The situation is the same in Georgia. First of all I think we have to continue to create confidence in the banking sector and be sure that the banking sector will have the ability and willingness to lend to the economy. The second thing is that we have to continue to implement major rehabilitation of the infrastructure of transit, would it be energy, would it be transport in this country. All these recommendations should be added to the advice I gave to the Armenian Government.”
As Descamps notes, initially EBRD as well as other donors have to recreate confidence and capital in the banks. “Between October 2008 and December 2009 EBRD committed new money, more than USD 350 million of which 90% is in the banking sector. That was for capital, subordinated debt and long term credit lines. That was the first priority because without that we would have major problems in this country. So, together with IFC and a few others we invested quite a lot in two systemic banks and three or four other clients. We helped to provide them with a sense of caution and access to long term funding.”
“Some of our partner banks are starting to use our money for lending. But they are more cautious about risks now. So I think we are now at the stage where they are trying to restructure their loan portfolio, they need some of our long term funding because of the short term GEL deposits and we are now doing co-financing with some of the corporate clients which need restructuring of their debts. And in the crisis it is normal that banks think about how to limit damage and how to stabilize their old clients. That’s how it explains why we do not have growth in loans,” Descamps says.
“I think that Georgian entrepreneurs and businessmen are also cautious and do not need money to expend capacity. Or some businesses or entrepreneurs are making losses and becoming bankrupt. We and others have to help banks to feel comfortable about risk,” Descamps adds.
“Georgia was a model of an ultra liberal market reform until the conflict of August. And up to then there was the first time the Government tried to promote concession and private public partnership for the big infrastructure that they had in the country. But the world changes. Maybe some limited potential investors are still today interested in port development or an industrial tax free zone but for roads and railways, nobody is interested today. We are the first one to try to promote the fact that one day we should have private operators coming in if there are good tenders and a good concession to try to pick up the next generation of big infrastructure. So we are ready to try to attract or bring back those kinds of private investors as soon as is realistically possible,” he says.
Discussion about this post