The FINANCIAL - New Reforms Expected to Deliver Tangible Results in Georgian Economy

New Reforms Expected to Deliver Tangible Results in Georgian Economy

New Reforms Expected to Deliver Tangible Results in Georgian Economy

The FINANCIAL -- The Georgian Government, now and after the upcoming elections, should continue ongoing democratization processes and be more assertive when it comes to economic issues, believes Dr. h.c. Sascha Ternes, Chairman of the German Business Association in Georgia.

According to Ternes, the current Georgian Government lost some momentum during its first two years in office. Minimizing negative trade balance is the main lesson that the recent currency shock has taught Georgia. Meanwhile, Ternes fears that strengthening of the Lari could see a return of a boom in import.  

“The Government had lost some time at the beginning of its term. The first two years were not so effective, as they could have concentrated more on economic development. What is good is that the Government is now trying to compensate for the deficiencies of the previous government. I have a feeling that there is now more freedom of expression and there is no pressure on businesses. The implementation of strategic projects, like “Produce in Georgia” and programs in the agricultural field was also very important. All of these can be part of an industrial policy which Georgia needs to adopt. Universal healthcare insurance was also an important project,” said Ternes.

In Ternes’s words, what society needs right now is a strong pushing of initiatives, new ideas and tangible results. “I very much appreciate the growth oriented reforms as recently initiated by the Prime Minister, including reforms of the tax system, pensions system, capital markets, education system and focus on infrastructure modernization.”

Q. The pre-election period is considered another test of democracy for Georgia. How are we doing so far?

A. One of the biggest achievements of Georgia in the recent past was definitely the election of 2012. I remember from talking with investors of different countries, that everybody was very positive about the election as it was very calm and peaceful. A new party succeeded in gaining the majority and the change of power happened without any scandal. It was the same with the following presidential elections. So it was a democratic and professional handover of government. It was a very good precedent for Georgia, contributing to its good image. Currently everybody has the same expectations. The Government promises that everything will pass peacefully, be well-organized, and people believe it due to the experience of 2012. We can also look at it from the macro-economic perspective. Normally during a pre-election period the economy slows down a little bit. People usually feel insecure and delay their investment decisions, as they just wait what will happen. However, this is not happening now. We see that macro-economic figures and volume of activity is still increasing. This is a very good signal that businesses have enough confidence and feel stability.

Q. From February 2016 the Georgian Lari started strengthening. What is the attitude of the business community - has a sense of stability returned for them?

A. The exchange rate is not necessarily the only indicator of stability for businesses. It is one instrument which we use every day for paying invoices or calculating investments. Of course, nobody likes when something dramatic happens with the currency but you cannot always avoid it because it is not under your control. Even with the devaluation that took place in Georgia, to a certain extent Georgian authorities could try to influence and optimize it, but overall it is about macro-economic fundamentals and what goes on in the world. Therefore professionally run businesses should always maintain a closed currency position in their books. For people who are Dollar-oriented the situation was of course much more painful than for Euro-oriented people. The exchange rate hit EUR 2.6 per GEL 1 and now it is again EUR 2.4 like it used to be in the year 2014 before the devaluation. So the difference is not significant. However, I realize that for consumers who have income in GEL and expenses in USD it was a heavy burden.

Besides those people who have to deal with exchange rates for professional reasons, there is another factor - that a lot of other people are paying too much attention to foreign exchange rates, who actually have no relation with it. This is because it is a part of our everyday life. We hear it on the radio, see it on TV, walk down the street and see it on scoreboards. I can recall one interesting example from one of the Balkan countries. People were very sensitive towards currency changes, so the government decided to abolish street scoreboards by law. The exchange rate was simply not visible anymore. If somebody wanted to exchange money they had to enter a building and get the rate inside. When you do not see it you do not think about it too much and accordingly, do not get too nervous. It is psychological. I hope that the recent devaluation has taught us a lot and in ten years’ time people will not talk about the exchange rate so much.

Q. Which business sectors were the main losers and winners of the devaluation?

A. The main losers during the devaluation were companies that could not change their prices, like electricity or telecommunication companies. Because of regulation they have their prices fixed in Lari, while many of them have expenses in Dollars.

As for the winners, maybe some trading companies who increased prices during the devaluation and have not decreased them meanwhile.

Q. What was the main lesson that we learned from the recent currency shock?

A. One of the main lessons is that from a macro-economic perspective the country understood that you cannot import more than you export. This imbalance has created the biggest problems. We have clearly seen the importance of increasing the domestic volume of international tradeable goods and services. Import dependence has been corrected a little bit. However, it can happen again.

This shock was also a lesson for consumers to demand Lari loans in the future. However, at the same time the devaluation has not necessarily helped to convince the population to make their savings and deposits in Lari as well. Still, it is really important as without customer funds in Lari the Banks won’t have enough resources to be able to give out loans in the national currency.

Q. One of the main concerns of Georgians for now is visa liberalisation and NATO membership. How will positive decisions in this regard reflect on our economy?

A. The visa issue is less important for businesses than NATO. The only thing which is very good regarding visa liberalization is that there is not a question of yes or no. Everybody is clear that Europe will agree to the visa liberalization for Georgia. The only question is whether it will be before or after summer. The European Parliament is working to adopt on an emergency mechanism to stop and suspend visa liberalisation in cases of abuse. It seems the agreement on Georgia will be achieved only upon implementation of this mechanism. So, it is just a question of time. We hope it will happen soon, especially before the upcoming elections. It is really important that Europe shows something tangible to Georgia. Papers, laws and agreements alone cannot make people happy. If you want to show that the EU is the future, then they must give something.

In terms of NATO, the situation is different. I personally cannot assess what the chances and the possibilities of NATO membership are. I think it is a difficult process. NATO members know that the membership of Georgia would be connected to certain geopolitical tensions. However, from a business perspective, if Georgia were to be under NATO protection we would experience a strong increase of foreign investment, as the country risk would minimize. It would be an enormous push for the country’s economy. 

Q. Your career in Georgia is related to the banking sector. Now you have decided to run your own business. What was the main difference for you between being an employee and an employer?

A. After being an employee for many years and dealing with the decisions that came from shareholders I appreciate the situation of being my own boss. So, I can implement my own vision. My main motivation to establish my Real Estate Fund, was that it is a market novelty and many people yet have to discover the opportunities which it provides. It is about collecting money from various investors and later collectively purchasing commercial real estate, generating income form long-term rent contracts as well as from the increase of the property’s market value. We are pioneers on the market. I mostly work with foreign investors as for locals it is still new. Therefore one of the challenges of the future is to work more with local investors. We have purposefully selected our activity only on commercial real estate, not residential space where we can see too many of ongoing construction projects. We have lots of interesting projects in the pipeline. Currently there are two more projects, which are under preparation. We are in the process of finding partners for that. The value of the projects will be in the range of USD 10 million.

Q. What are the main challenges that foreigners face while running a business in Georgia?

A. After so many years of being in Georgia I do not face any of the typical challenges while running a business in Georgia. What I see at the German Business Association when new investors are coming is that very often they face some typical issues. So we always try to help and support them. The main task is to have full information and to find the right, most trustworthy and best contact partners. I have seen lots of people who have lost money trusting the wrong people. Another important issue for foreigners is to know that a business will not run on its own in Georgia. You must have dedication and persistence. 

Q. You recently co-established the Independent Directors Association. What will be the main benefits of your members?

A. Apart from my own business I dedicate a lot of my time to volunteering and bringing some benefit to the Georgian society. I am always very interested in contributing to different projects, like the German Business Association, the German International School. One such project was the recently-established Independent Directors Association, where we represent, promote and support Independent Supervisory Board Members.

Based on best-practice of many other countries worldwide, a couple of people, including myself, want to improve corporate governance standards in the country by offering our knowledge, skills and experience to business-owners in order to enhance transparency and efficiency in running running their companies. The establishment of the Association took place following certain key changes to the law on entrepreneurs and the law on the securities market.

Appointing an Independent Director to the Supervisory Board is a necessary condition for a company to place its shares on the stock exchange to raise new equity. This improves the trust of the shareholders as well as creditors, suppliers and other partners, and increases the ratings of the company overall.