Issue 3, 2014. June-July

   

MANAGING RISK: GEORGIA'S DEVELOPMENT BANK PROPOSAL

Development banks have historically served as mediators to balance investments against political and economic risk in up-and-coming economies. On April 25, 2014, the Georgian government submitted a proposal for the creation of a Development Bank of Georgia, JSC. Taking a peek at established development banks and a revealing World Bank report can shed some insight on the motive and promise of such a proposal.

Cordelia Ponczek

Irakli Kovzanadze, the CEO of the Partnership Fund, speaks with George Kvirikashvili, the economy minister. The Partnership Fund is Georgia's state-run investment fund. There have now been proposals to also create a development bank.

On June 13, Georgia will host, in conjunction with the European External Action Services, an investment conference. Georgia's investment outlook is rosy. According to figures cited in a bulletin that the Georgian government provided to potential investors, Georgia predicts 5 percent GDP growth in 2014; foreign direct investment in 2013 was $914.4 million; and trade turnover was listed at $10.784 billion for 2013 (a 5.5 percent growth from 2012). The numbers show Georgia's commitment to growth, and the bulletin shows the government's commitment to enticing internal and foreign investors to have faith in Georgia.

There is a certain pedantic marching order to establishing an economically stable country. Georgia, in its transition to economic independence, has recently taken another step toward long-term economic growth and stability. On April 25, 2014, the Georgian government introduced draft legislation proposing a Georgian Development Bank. According to the drafters of the proposal, the bank will be authorized to issue loans through commercial banks, provide guarantees, issue bonds, and carry out other activities as envisaged under the new law. The proposed bank would be a joint-stock company: a business owned through its shareholders based on the Partnership Fund (PF), a Georgian state-owned company.

The World Bank defines national development banks as "financial institutions with a public mandate and more than 30 percent of their shares owned by the state." Differing national development bank characteristics include their respective policy mandates, financial services offered, targeted clients, regulation and supervision, business models, governance frameworks, and challenges faced. The purpose of such banks is straightforward: a development bank exists to provide financing, bolster long-term development, and protect potential importers and exporters against political and economic risks. It is the ultimate risk mediator. By servicing security and enablement — development banks are the quintessential skeleton key to readily open doors of opportunity to knocking benefactors and to lock them from threats. Such institutions guarantee stability, efficiency, and access to the market.

Georgia is one from a representative spectrum of developing and developed economies—spanning from Uganda to Germany—to create a development bank. A development bank is a brilliant concept for Georgia and promises a bright future of cooperation between the government and national and foreign business. Georgia, like other countries, seeks the ability to establish a secure holding of its assets and finances. Looking to a complementary westward example, Croatia established its current development bank, Hrvatska Banka za Obnovui Razvitak (HBOR), in 2006 (the original institution was established in 1992) to diversify its economy and provide financing for up-and-coming businesses and private corporations. These enterprises were curious to invest in Croatia, but were wary of political and economic shock risks. Through HBOR, Croatia was able to guarantee its offers against risk and grow its investment pool: by 2009 HBOR's total assets were equivalent to 5.5 percent of the Croatian banking system.

Bulgaria, a fellow member with Georgia in the Organization of the Black Sea Economic Cooperation (BSEC),established the Bulgarian Development Bank (BDB) in 1999, though the mandate was reworked in 2008 to receive funding from other investment organizations, the Black Sea Trade and Development Bank being one such funder. Bulgaria's total assets in 2009 were $664 million, or 1.24 percent of the total banking system. Notably, both Croatia and Bulgaria are members of the European Union: Croatia joined in 2013, seven years after the establishment of HBOR; Bulgaria in 2007, eight years after the initial establishment of the BRB and one year after its mandate transition.

HBOR and BDB are two sides of the same coin of development bank potential. While Croatia's bank is almost exclusively reliant on government funding and subsidy, Bulgaria's BDB is self-sufficient. But both can borrow from other financial institutions. Yet, HBOR's debt comes with a government guarantee and BDB's does not. Across the board, the differences presented by Croatia and Bulgaria are not uncommon. A recent World Bank survey showed that 84.4 percent of national development banks could borrow from financial markets, 56.6 percent had their debt guaranteed by the government, and, uncomfortably, only 25.5 per cent could operate self-sufficiently if government transfers were cancelled. This puts the vast majority of development banks in the somewhat precarious position of not being privately guaranteed, something that Georgia may want to consider as it creates a vision for its future bank.

Another diversifying aspect of development banks is their targeting of subsectors and markets for funding opportunities. The highest proportion of lending opportunities is typically awarded to services—followed closely by agribusiness. Georgia will probably mimic this trend, as its services sector and agricultural potential are both common rallying points. Unsurprisingly, the highest target market of development banks is micro, small, and medium enterprises. This grouping is contrasted against the runner up—large private corporations. The win of small business is predictable for two reasons: First, smaller businesses are more likely to be local businesses with a more relevant non-monetary investment in the community; and, second, such small businesses are more likely to be swayed or feel the effects of risk potential. Large private corporations are less likely to feel the heat from political and economic risks and more likely to have the resources to look before they leap. But countries like Georgia still want to provide plenty of bait for the corporations: they present the second-largest target market for development banks. The loans to such businesses are most likely to be syndicated loans, loans for working capital, or loans for start-up activities. It is in Georgia's favor to simultaneously cultivate the smaller, less lucrative (but more numerous) market of local businesses to anchor local economies while also keeping open prospects for larger corporations to fuel further interest and development on a national level.

Perhaps the unsung hero of development banks is not found in conspicuousloans and lofty investment goals, but in the smaller financial services offered to businesses and citizens. Many development banks offer loan guarantees, money transfers, and business consulting, matching, and training—good tools for Georgia to offer to both its larger clients, to instruct them on the Georgian market, and its smaller clients, for them to learn the ropes of an ever-evolving free market. Consultation and training, in particular, are opportunities for the Georgian government to educate its partners and reverse some of the more pervasive (and damaging) misconceptions reminiscent of pre-reform decades.

Just as free elections with a strong turnout imply a healthy democracy, so can a vibrant, varied, and efficient market display the colors of a stalwart economy. The Development Bank of Georgia is an opportunity for good governance to meld with good market policy to further enhance the liberalization reforms that have made Georgia so temping to investors. Hitching the success of national goals with private opportunities is a way to ensure productive futures for both parties and to keep Georgia in the running as a global destination for business and investment. As the investment bulletin points out, Georgia was ranked number 8 in theWorld Bank's Ease of Doing Business rankings in 2014 — and a development bank may be the means to bring that accolade to fruition.

Cordelia Ponczek is a graduate student and analyst based in Warsaw, Poland.

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