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Georgia Comes off the European Financial Crisis Relatively Unaffected

Published: December 26, 2011 | 7:31 pm
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Tom Lunbeckweb

IFC Regional Head for the Caucasus: “Right now we’re considering increasing credit lines to the banks”

The COMMERCIAL TIMES

The year 2011 is coming to an end, but the European crisis is not. Christine Lagarde, Managing Director of the International Monetary Fund (IMF) says: “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies, that will be immune to the crisis that we see not only unfolding, but escalating.” However, Georgia keeps doing its best to be a more or less lucky exception. The COMMERCIAL TIMES interviewed Thomas Lubeck, Regional Head for the Caucasus at IFC (International Finance Corporation), a member of the World Bank Group, regarding the possible effect of the European crisis on Georgia, and IFC’s plans for the local market in the coming years.

- As we are all aware, European markets are having a hard time. Despite a number of high-level global meetings, there’s still no survival plan for Europe. “The European debt crisis is growing to the point that it won’t be solved by one group of countries,” Christine Lagarde, Managing Director of the IMF, said on December 15. How contagious can the European crisis be for the Caucasus region, in particular for a relatively small economy like that of Georgia?

Thomas Lubeck - Compared to many countries in the region, Georgia is relatively well positioned. What will happen in Europe is anybody’s guess; nobody can predict the future. I will leave that to the experts of IMF and other organizations.

However, we always like to think in terms of medium-case and bad-case scenarios. In any of these, Georgia comes off relatively unaffected; the effects could come only indirectly. The major difference between now and a number of years back is that Georgia’s financial sector is much better protected than it used to be. This comes in a number of different ways. The first is that local commercial banks rely much less on short-term commercial lending. One way to measure the degree to which banks are lending or borrowing in this market is the loan-deposit ratio. Just before the war it was 180 percent, and all these loans were repaid. Now it’s 110 percent, which means Georgian banks are limited to funding from their own capital, from deposits as well as from international financial institutions, which are a more stable source.

- With Georgia hit hard by the global economic crisis in 2008, IFC played a significant role in supporting banks and businesses, providing both investments and advice at a critical time. Which sectors were the top priorities for IFC in Georgia then, and what is IFC’s strategy towards our country today?

Thomas Lubeck - IFC, together with other international financial institutions, made large investments to stabilize Georgia’s financial sector in 2008, mainly because hot money was funding commercial banks and could not be prolonged. This risk is now completely out of the system. If European banks are scaling back, or European investors are scaling back, it is not going to affect Georgia’s financial system significantly.

IFC has invested $250 million in Georgia’s financial sector. We are the shareholders in TBC Bank; we have a large investment (subordinated convertible loan) in the Bank of Georgia, as well as senior and subordinated loans in Bank Republic. We have also supported Georgia’s banks with trade finance as well as risk management products. In the medium term, we are trying to support the banks with trade finance in order to make sure they get very good and competitive trade finance to import capital goods or consumer goods.

Right now we are considering increasing credit lines to the banks in order to support Georgia’s economic expansion. After large investments in 2008 and early 2009, IFC turned its attention to outside the financial sector, notably hydropower. Now we feel it is the right time to go and give the banks additional funding in order to target small and medium enterprises, which are very important for employment. Our funding refers to loans for small and medium enterprises in general, and in particular it focuses on agriculture. We think there is a lot of potential to try to increase access to finance for this sector. If you look at the Georgian economy, most employment and business is done within small companies. We think making more money available to this sector is good for the broader economy, and for employment.

Q. Could you name the concrete figures how much IFC will invest in Georgia in 2012?

Thomas Lubeck - The amount that IFC invests in any given year is a function of demand and depends on successful commercial negotiations, hence we are very cautious in making any forecasts. Last year IFC invested more than $70 million in Georgia. IFC is open for business in Georgia and I am sure we can continue a good trend in 2012. We are actively pursuing opportunities in the financial sector, as well as outside.

Certainly, for IFC the financial sector will be the main area where we will be working next year. Particularly we will be focused on small and medium enterprises in the agriculture sector. In addition, there could be potential for us to invest in hydropower, which is not so much related to the crisis right now, but relates to Georgia’s longer-term competitiveness. IFC made two investments last year in hydropower: one was a long-term senior loan in Paravani hydropower project, which is 87 megawatts, and we also participated together with Norwegian Clean Energy Invest in the early development of the Adjaristsqali Cascade through IFC InfraVentures, an early-stage project developer.

- Georgia joined the IFC in 1995, in the aftermath of economic collapse and civil unrest after independence. IFC designed its strategy to address Georgia’s limited foreign investments, the non-existence of large companies, limited access to financing for a nascent small and medium enterprises sector, and the lack of advice for private companies on business related issues (e.g. corporate governance, leasing). How has Georgia’s economic performance improved through this assistance?

Thomas LubeckWe are extremely happy with the investments that we made in Georgia over the years. If we go back far enough, the very first investment that IFC did in Georgia was in Borjomi mineral water factory, when we took an equity stake and helped them to modernize. We have been actively involved in the financial sector since the very beginning; there are a countless number of small and medium enterprises and individuals who have benefited from IFC funding. In addition to that, we made key investments in infrastructure as well, including construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline, which helped Georgia to improve its energy security and energy independence. We have also invested in the construction of a new terminal at Tbilisi airport in order to modernize transport infrastructure. More recently, I was also very proud that IFC invested in Tbilvino, Georgia’s leading wine exporter, with a $1.5 million loan to establish a grape-collecting and crushing facility near Kvareli. Development of the wine sector is especially important for Georgia because of the cultural heritage of viticulture and because of the sector’s potential to increase export, employment, and income for rural communities, especially in the Kakheti region.

- As for the advisory services that IFC is also well known for, in which sectors do you most see a need for consultancy and expertise?

Thomas LubeckIFC is best known to the public for the investments that bring real money to the table. However, equally important is our advisory business, which is like a consultancy service. In terms of the active programs that we have right now there’s a Food Safety Improvement project, which helps local Georgian producers implement international standards for food safety and thereby increase exports. IFC’s other active project is the Tax Simplification project, which we are implementing in partnership with the Revenue Service of the Ministry of Finance of Georgia. The aim of this cooperation is to make tax regulations and procedures simpler for micro and small businesses. Over the years Georgia has done extremely well in the Doing Business report and proved to be a business-friendly environment. We are trying to help the government further this goal by making life easier for small and micro businesses. Beyond that, we also have advisory service programs helping banks to overcome the economic crisis, in particular dealing with various aspects of risk management. Quite recently IFC, in partnership with Global Association of Risk Professionals (GARP), a globally recognized leader in financial risk testing and certification programs, launched a formal risk management training and certification program to enable financial sector employees to enhance their risk management skills. The first phase of the program focused on training local partners to build their capacity and certify them as official GARP trainers. The certified trainers will train the staff of local banks and financial institutions during the second phase. Georgian banks have weathered the biggest possible crisis that one could ever imagine with the conflict in August 2008 followed immediately by the global financial crisis. Today things are going quite well in Georgia’s financial sector.

- What will IFC’s strategy be towards Georgia in terms of advisory services in 2012?

Thomas LubeckIn 2012 IFC will continue all the active projects in terms of advisory services. I think in agriculture, which is our priority on the investment side, there might be some opportunities for us to get involved. If we do something we want to make sure that IFC is contributing something new, and that we coordinate well with other international donor organizations to avoid any overlap. We have a good dialogue with the World Bank, EBRD, USAID, KfW, and ADB, and of course with the Georgian government.

 

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