ADVERTISEMENTGeorgia / P2ADVERTISEMENTEconomy catches ‘positive tailwinds’ in its sails topost 6% GDP growth in first half of 2014ECONOMY Trade and investment, which already enjoy growth, are set to leap forward with the signing of new trade dealsEarlier this year in June, Georgia’s Prime Minister,Irakli Garibashvili, signed the landmarkAssociation Agreement, including the Deep andComprehensive Free Trade Agreement, with theEuropean Union. With more than 80 percent ofGeorgians in favor of E.U. integration, the new deal isdesigned to help the country move closer to legislativeand regulatory reform and the standardizationof rights and freedoms.The agreement, which abolishes tariffs on Georgiangoods exported to the E.U., paves the way forfree trade with the 900-million strong E.U. consumermarket, the world’s largest, as well as visa-freetravel, and is set to boost Georgian GDP by an estimated4.3 percent, while increasing the country’sexports by 12 percent.This is good news not only for Georgia, but alsofor U.S. investors looking to set up in the country,which is quickly establishing itself as an importanttransit route between East and West. The Georgianeconomy has registered growth in excess of 6 percentsince 2010, except last year when a contractionin public spending resulted in 3.6 percent growth.This year, the economy rebounded again, registering6 percent growth in the first half of the year.The Economist says that the Georgian economy isexperiencing “positive tailwinds,” with robust banklending, a rise in public spending (owing to theincrease in pensions and implementation of infrastructureprojects) and a rise in private investment.The new trade agreement with the E.U. willfurther strengthen these tailwinds. Here, GiorgiKvirikashvili, Minister of Economy and SustainableDevelopment and Vice-Prime Minister, talks aboutthe Association Agreement with the E.U., how it willaffect trade relations with the United States, bankingsector consolidation and priorities for the future.How will Georgia benefit from the new trade dealwith the E.U.?Signing the Association Agreement with the EuropeanUnion, and the accompanying Deep andComprehensive Free Trade Agreement (DCFTA),was a remarkable event. It will be a big attractionfor international investors to be able to producegoods and services in Georgia and sell them withoutcustoms tariffs in the E.U. The strategic positioningof Georgia in the coming decades will be throughstrengthening its European DNA and increasing theperception of Georgia as a European country, but atthe same time with more flexibility in terms of redtape and taxes than a typical European country wouldhave. This will boost our attraction for financing fromthe region and the East, which is a goal for us. So wecan act as a transit corridor, with the high levels ofdemocracy and political and legislative stability ofa European country, but with much more flexibilityand lower taxes than the average European country.How will the E.U. agreement affect Georgia’s traderelations with the United States?First of all, our strategic partnership with the U.S.has been vitally important for Georgia, for maintainingour sovereignty and territorial integrity. We havereceived a great deal of support from the UnitedStates, which has been very important for us. We aregradually moving towards a free trade agreementwith the U.S. It is definitely part of our high-levelpolicy dialogues, and we have begun carrying outreforms needed to make this happen, but it will taketime. The U.S. is now negotiating the TransatlanticTrade and Investment Partnership with the E.U., andof course, our ultimate goal is E.U. membership. So,we are preparing for this now in close cooperationwith the U.S. trade representative.What level of U.S. investment is Georgia receiving?We have had several large investments from theU.S. in the hospitality sector and in manufacturing.Two American consortiums have also expressedtheir interest in the new port construction in Anaklia,which will continue to offer new investment opportunitiesas it is a multiphase, multibillion dollarproject. The port will boost our annual containershipments by 20 percent and have a significant impacton Georgia’s importance as a transit corridor.Even now, companies from China and Central Asiasuch as Azerbaijan and Armenia are using us as atransit hub.As minister, what are your top priorities?There are two projects that are the highest prioritiesfor our ministry. First is the development ofthe capital market, which has been really dormantduring the last years and is in need of a seriousoverhaul of legislation. We are working on this withthe World Bank, the Asian Development Bank, USAIDand various E.U. authorities.We are working on regulatory reform and creatingregulators that are separate from the CentralBank. These regulators will cover the insurance,pension and capital market divisions. We are alsoworking on the instruments of the capital market,including the development of bond markets, andon encouraging Georgian companies to go public –first on the Georgian Stock Exchange, and then onother markets like the London Stock Exchange orthe Warsaw Stock Exchange.Portfolio investors will not come to Georgia unlessthey have an exit option on the local stock exchange sothe potential that the development of capital marketswill bring for our banks is also significant. We arealso interested in an affiliation with a major EuropeanGeorgia offers investors:Duty-Free Access to900 million marketA politically stableinvestment destinationA secure, corruption-free andtransparent business environmentSimple, low and fair taxationwww.investin<strong>georgia</strong>.orgstock exchange, and we are now in talks with severalof them. This will allow Georgian investors to accessEuropean securities and vice versa, but in order for thisto happen, it is critical to first establish a viable localexchange and a credible clearing system.NATO and E.U. membershipaspirations furtherstrengthen U.S. relationsTrade agreements are set to increase trade for regional allyGeorgia has emerged as a peacefuland democratic presence inthe region since the breakup of theformer Soviet Union, with increasinglyclose ties with the West. Theformer Soviet republic, which haslong stated its interest in joiningboth the E.U. and NATO, moved abit closer to this latter union afterthe security’s alliance’s Septembermeeting in Wales, when it wasgranted enhanced member status.“Since the late ‘90s, joining NATOhas been a priority in Georgia’sforeign policy,” explains Dr. ArchilGegeshidze, Georgia’s Ambassadorto the U.S. “Since then, we havetaken sometimes modest, sometimesbolder steps to get closerto this goal, even though it has attimes been risky for us. Despitethis, we have not changed our foreignpolicy orientation and we willcontinue on this path.”The country’s strengthening relationswith the U.S., with whom itestablished diplomatic ties shortlyafter its independence from theformer Soviet Union in 1991, havespeeded its journey to full NATOmembership. The U.S. is committedto helping Georgia deepen itsEuro-Atlantic ties and strengthenits fledgling democracy, and hasbeen a source of constant supportfor the new nation, says Dr.Gegeshidze, who adds that the assistanceprovided by the U.S. “cannotbe overestimated.”“Politically, the U.S. has always supported Georgia’ssovereignty and territorial integrity, and thissupport has been demonstrated in bilateral frameworks,relationships and multilateral settings. Asa permanent member of the Security Council, asan influential member of the O.E.C.D., and as avery powerful actor in world politics, the U.S. hashelped Georgia reform, perform and mature as a newdemocracy. We owe our independence, our level ofdemocratic development, and the degree of securitywe enjoy to this friendship with the U.S.,” he says.However, the ambassador is quick to add thatGeorgia’s decision to access NATO and secure E.U.membership should not be taken asa rejection of Russia, but rather assteps to secure regional peace andprogress. “We have a strong beliefthat this is something which contributesto the common good, commonpeace and common welfare ofthe region,” he says. “The stronger,more secure, and wealthierthe countries in the region are, thebetter future prospects of developmentare. So we do not considerthat Georgia’s choice of accessingNATO or seeking membership in theEuropean Union is something thatnecessarily goes against Russia’sinterest, just the contrary.”Growing relations with the U.S.resulted in the 2009 U.S.-GeorgiaCharter on Strategic Partnership,which focuses on four priority areas:democracy, defense, trade and energyissues, and cultural exchange.Policy makers from both countriesmeet yearly to review commitmentsand update their activities.Economic relations between thetwo countries have benefited fromthe General System of Preferences,which has increased Georgia’s tradewith the U.S. by 180 percent, says Dr.Gegeshidze. Talks are now underway for a free trade agreement. “TheU.S. is becoming one of our primaryexport destinations. It hasn’t toppedthe list yet, but it has moved up theladder. The number of U.S. investorsin the country has also increased,and we are looking to improve conditions so thatU.S. investors will enter the Georgian economy ineven greater numbers.”An additional enticement is Georgia’s recentlycompleted trade agreement with the E.U., which willopen new trade avenues with the U.S. via the latter’sTrans-Atlantic Trade and Investment Partnership(TTIP) when finalized.“Through Georgia’s Deep and Comprehensive FreeTrade Agreement (DCFTA) with the European Union,investors will also have access to another 300 millionmarket in the U.S. for Georgian products, so theseare huge opportunities which should be taken intoaccount,” says the ambassador.“Politically, theU.S. has alwayssupportedGeorgia’ssovereigntyand territorialintegrity, and thissupport has beendemonstratedin bilateralframeworks,relationshipsand multilateralsettings”Dr. Archil M.Gegeshidze,Georgian Ambassadorto the U.S.“We can act as a transit corridor,with the high levels of democracyand political and legislative stabilityof a European country, but withmuch more flexibility and lowertaxes than the average Europeancountry”“We are working on theinstruments of the capital market,including the development of bondmarkets, and on encouragingGeorgian companies to go public”Giorgi Kvirikashvili,Minister of Economy and SustainableDevelopment and Vice-Prime MinisterAnd the second priority?The second priority is pension reform, which isclosely tied to capital market reform because wewill need to introduce pillar 2 and pillar 3 pensionsystems. In collaboration with international financialinstitutions, we are designing a package that will be acombination of these two pillars, with some compulsoryelements but also with a combination of incentivesfor a voluntary saving system. So, this is a veryimportant reform that will have a large impact overthe long term and it is needed. In addition to providingdignified living standards for our elders, pensionreform will also allow for new sources of investmentfor the capital market, which is why the two reforms areclosely related and need to be carried out in parallel.The Georgian banking sector clearly weathered thefinancial crisis that took place in 2008-09 in the U.S.and Europe, but what are the new challenges facingthe sector in terms of the globalization of internationalcapital flows?The banking sector in Georgia did navigate that periodof crisis quite well, partially because of our conservativeregulations. Also I would say that the degree of integrationof the Georgian economy in the global economywas quite low, so this was another reason why Georgiawas not affected drastically by the crisis. But thereare challenges ahead for the Georgian banking sector.Major challenges are the new regulations and new riskmanagement criteria introduced internationally such asBasel III, so there is a lot of work ahead for our regulators.But the banks themselves also need to understand thatthe world is changing and they will be more and moreexposed to international fluctuations. We need to be preparedfor that. We need to have some risk management inthe system. We need to be fully in line with internationalContinued on page 3
ADVERTISEMENTGeorgia / P3ADVERTISEMENTThe economy minister foresees an inevitable consolidation of the financial sector, if Georgian banks are to be more competitive on a world levelCont. from page 2practices. There will also be new international playersentering the Georgian banking sector.So there are challenges ahead, and the consolidationof the banking sector is inevitable because withouthigher capitalization, it will not be possible for banks tobe competitive. With borders opening and globalization,the sector must be prepared for challenges and forcrisis, and our local banks must be competitive enoughto deal with the entrance of major players. We alreadyhave several international banks in our country andthere are others that are showing interest. The financialsector here remains quite lucrative for investorsso there will be new players and a consolidation andcapacity strengthening of our existing banks.Can you tell us about the “Produce in Georgia” program?It is an agricultural promotion program, which isoverseen by the Ministry of Economy and promoteslocal business in four ways: First, we sell governmentland to the business for a symbolic price of onelari. Second, we share collateral obligations up to 30percent against commercial banks for four years.Third, we subsidize the interest rates on loans fromthe commercial banks so companies only pay 1 to 3percent interest on their loans during an incubationperiod of two years. Fourth, we provide foreign expertiseand know-how not only in agriculture but also inlight manufacturing so we bring in new technology.At the ministry, we have an Entrepreneurship DevelopmentAgency, which funds this program and whereinterested parties can get all of the information theyneed. Also under our roof is the State Property ManagementAgency, which identifies suitable property for“Produce in Georgia” projects. It is our mission to getthis property working in our economy, and we still haveabout 40 percent of our agricultural land yet to privatize.GDP - real growth rate2.5 % (2013 est.)Industry21.6%Agriculture8.5%Exports$2,618 billion (2013 est.)GDP - COMPOSITION BY SECTORExports - commoditiesVehicles, ferro-alloys, fertilizers, nuts, scrap metal, gold, copper oresExports - partnersAzerbaijan 25%, Armenia 11%, Ukraine 7%, Turkey 6%, Russia 6% (2013 est.)Services69.9%JSC Partnership Fund,a government-mandated partnerThermal Power Plantin GardabaniWith assets of over $3 billion, the fund targets most potent sectorsThat JSC Partnership Fund has its finger on the pulseof Georgia’s future prosperity is no exaggeration. Itrepresents a formidable partner for investors looking tomove into the region. Capital assets include GeorgianRailway – the country’s largest state corporation anda major global transit link between the Caucasus andCentral Asia and Europe’s international markets – andGeorgian Oil & Gas Corporation (GOGC), which ownsand operates nearly 2,000 kilometers (1,242 miles)of gas pipeline connecting Russia, Azerbaijan andArmenia, and a 375-kilometer Baku-Supsa oil pipeline.The Partnership Fund is also the owner of stategiants Georgian State Electricity System (GSE) andElectricity System Commercial Operator (ESCO) – ina country with enough hydroelectric potential to becomea regional exporter.A state-owned investment fundestablished in 2011, JSC PartnershipFund today boasts assets in excess of$3 billion. With a Fitch rating “BB-”,equal to the sovereign ceiling of Georgia,the fund promotes investment inthe country by providing co-financingin large-scale projects at their initialstage of development, thus supportingprivate investors with stable longtermequity and risk sharing.Separated into two business units,asset management and investmentactivity, the fund boasts projects implementedor under implementationin various sectors with a value of over$1.5 billion.Mandated to invest solely in Georgia and with aspecial focus on energy, real estate and hospitality,infrastructure, agro-business and manufacturingdue to the development potential of these sectors,the Partnership Fund made its first successful exitsfrom two hospitality projects. These include the HotelGino Wellness and Spa in the historic Rabath Castleand the Hotel Royal Batoni in Kvareli, and one agriculturalproject (a livestock breeding farm in Koda)in 2013.Last year, the fund also completed structuringand resumed construction of its first large-scaleenergy project, the Gardabani Combined Cycle GasFired Thermal Power Plant. C.E.O. Dr. Irakli Kovzanadzesays. “Currently our biggest projects arein the energy sector. One of these is the Gardabaniplant, which is the largest thermal plant developedsince Georgia gained independence. It is a230 megawatt plant with an estimated cost of $220million, and the Partnership Fund, together withGOGC is taking an equity participation in the plant.Dr. Irakli Kovzanadze, C.E.O.of JSC Partnership FundThe contractor is the Turkish business group ÇalikEnergy. Another giant energy project is NeskraHydro Power Plant, near the Russian-Georgianborder. It’s an international project with a cost of$750 million, which will begin next year.”Until now, says Dr. Kovzanadze, most of thefund’s partners have been regional investors – Azeris,Kazakhs, Turks and Israelis, who have movedin while European and U.S. investors have taken await-and-see attitude. Many of these regional partnersare interested in real estate investments. ThePartnership Fund is now developing a five-star,152-room spa resort with Kazakh partners in Borjomi,famed for its mineral waters, and a five-starRadisson resort in historic Tsinandali.Though U.S. investors havelagged behind, Dr. Kovzanadzesays that he sees significant potentialfor them in Georgia’s largerinfrastructure projects, such asport, railway and road projects, aswell as in the energy sector, whichabounds with greenfield opportunitiesthat have been attractingsignificant interest.Georgia’s pipeline of hydropower plant investments promisesrobust export capacity withTurkey as one of the key electricityexport destinations, giventhat country’s tariff structureand the countercyclical nature ofGeorgian-Turkish consumption(Georgia consumes the bulk of its energy in winter,while Turkey’s peak demand and consumption arein summer).“Georgia has a very good location as it is situatedat a crossroads with access to Turkey, Azerbaijan,Armenia and Russia. We are organizing some roadshows in America and I hope that this will increasetheir interest in these projects, as well as othersin the energy sector and in tourism,” says Dr. Kovzanadze,who is also an economics professor authorof written various books on banking crisis andprevention.“I think the interest will come in the next twoor three years. Our economic environment now isquite stable. I am a banker and I have more than20 years of experience in this, and I can say thatthe situation in Georgia is quite stable. The budgetdeficit is under 3 percent, which is below the IMFmark for Georgia. GDP growth is 6 percent, and theexchange rate is also stable. These factors indicatea stable economic situation.”FinancingGeorgia’s futureJSC Partnership Fund’s (PF) goal is to support privatecompanies through investments in commerciallyviable projects. In addition, the fund’s aim is tomanage the assets of Georgia’s largest state-ownedenterprises, including: Georgian Railway, Georgian Oiland Gas Corporation, Georgian State Electrosystem,Electricity System Commercial Operator and 24.5%of shares of JSC Telasi.Currently, as the fund’s assets have reached GEL5bn ($2.9 bn), it focuses on energy, infrastructure &logistics, manufacturing, real estate & tourism andagribusiness sectors.Investment Activities• Three completed projects (hotels in Akhaltsikheand Kvareli and a livestock breeding farm in Koda).• 9 projects under implementation (among them are230 MW Gardabani CCTPP; 210 MW Nenskra HPPin Svaneti; development of the New Black Sea port inAnaklia; 5-star Rixos Hotel in Likani; 5-star RadissonHotel in Kakheti; development of Tskhaltubo SpaResort in Imereti; and Polyurethane Sandwich PanelProduction Facility.• More than 15 projects in the pipeline.www.fund.ge
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