Issue 1, 2018. February-March



The Georgian government is unrolling a sophisticated program to create new capital markets in the country, with major steps planned for 2018.

Sally White

Georgia is going to be hearing a lot about finance in 2018. This may not be the usual stuff of Georgia's social media, television, newspapers or magazines, but they will all be broadcasting a "financial education program" launched by National Bank of Georgia (NBG) Governor Koba Gvenetadze.

Gvenetadze has goals for the Bank's financial education program: for the general population, the aim is to remove the "fear of exchange rate volatility" and to help society learn to "manage its own finances." The message to companies is that markets will be able to compete with the banks in offering funding. There should be "cheaper local-currency bond-market financing and increasing opportunities to cover currency volatility."

An Ambitious Plan

Regulation and supervision must also be put in place for derivatives markets - these markets will enable companies to cover financial risks such interest rates, exchange rates or commodities. In a joint project with the European Bank for Reconstruction and Development (EBRD), a draft law has been formulated, as have regulations, infrastructure for information to ensure transparency and monitoring. Georgia has spent several years working behind the scenes to make sure they are in line with international standards, EU directives and the principles of the International Organization of Securities Commissions.

The government has already drawn up a schedule: regulations for investment funds should be passed in the second quarter; regulations on the issuance of tradable GEL securities should be passed in the third quarter; and regulations on pension reform are slated to be passed in the last quarter of 2018.

The developments in mainstream financial markets -- designed to boost the flow of international money, provide investments for Georgia's new pension funds and insurance companies and boost economic growth -- are already showing success, and a number of local currency bonds have been issued.

The NBG has been accepting GEL corporate bonds, and the government has issued a "benchmark bond." (The latter will act as standard against which the performance of other GEL bonds can be measured, adding further to international investor requirements.)

However, at the moment, those most active in trading are the local banks. "We understand that these markets can't develop overnight, but we do aim to move forward, albeit gradually and at a steady pace. We believe that markets should develop from simpler to more complicated instruments, with the former providing the foundations on which the latter can be built," Gvenetadze told

The financial sector is expecting to see local rather than foreign players as the main drivers of the government's market development program, at least initially. However, international fund management groups could perhaps become new foreign entrants as opportunities in pension fund management opportunities open up.

Tax Incentives

In a major boost to incentivize investment among both local and foreign investors, Georgia's tax code has been amended as from the end of January this year to be more user-friendly. Now, according to Galt & Taggart (G&T), capital gains and interest-rate income on debt and equity instruments (such as bonds and shares) are exempted from tax. These must have been issued by a Georgian resident legal entity through a "public offering and admitted for trading on an organized market recognized by the National Bank of Georgia," states G&T's bond market newsletter.

In addition, interest income from debt securities is tax exempt until 2023. Investors are also being reassured by tougher company reporting requirements.

Market Competition

These tax incentives should appeal to international funds and help create more local ones. They could, says G&T Brocker Otari Sharikadze, help reactivate the local stock market. Other moves expected to increase participation in Georgia's markets are likely to widen the range of what registered brokers on the stock market can do, for example, allowing them to participate in the primary market for government securities and trade foreign exchange, and this could bring in more financial market compeittion by increating broker numbers there.

G&T (owned by Bank of Georgia) along with TBC Capital (owned by TBC Bank) currently dominate the issuance and trading of Georgian bonds and equities domestically and internationally, as well as investment banking services. The fact that the country's two major banks have been able to trade profitably in the local bond markets has been a major factor in their support and investment in the markets.

Sequential Approach

Helping Georgia down the route to fully developed financial markets, with technical assistance, funding and market-building, have been international financial institutions (IFIs)--especially the European Bank for Reconstruction and Development (EBRD), which has issued dollar and lari bonds to launch Georgia's markets. Their strategies can be observed in action in neighboring Armenia, for one, which is ahead due to its advantages of having a long-term international bank presence in HSBC and a stock market that is part of the world's largest international exchange operator, the U.S.-based NASDAQ OMX. Market turnover has increased as a result.

Armenia has issued covered bonds (asset-backed bonds, deemed to be among the safest bonds) and has a program in place for hedging tools to manage financial risks in currencies, interest rates, and commodity derivatives. A derivative is a financial product such as a future, option, or warrant, whose value derives from the value of an underlying asset, such as a commodity, currency, or security. The NBG's sequential approach to market development has already established not only local-currency bond issuance, but also dealing in foreign exchange, (dealt-in using "spot," or today's rates), money markets and government fixed income (a bond with a fixed rate of interest). Next will come risk-management markets for forward (purchase at a future date) foreign exchange contracts, shares and then swaps and other derivatives. An interest rate swap, for example, is a contract between two counterparties who agree to exchange the future interest rate payments they make on loans or bonds.

Pension fund reform later this year and insurance market development will help complete the circle by providing new funds which will provide local, long-term investor funding.

Stock Market

Timing for re-launching local share trading, one of the most popular forms of investment internationally for individual investors, is not likely until early 2019, according to the CEO of the Georgian Stock Exchange, George Paresishvili.

Before then, upgrades and new IT infrastructure, which full integrates the stock exchange and Bloomberg platforms, must be completed, and regulations have to be put into place.

Then training will be needed for the market staff, stockbrokers to the new stock market, and marketing of the stock market to the domestic and international investment communities needs to be carried out.

Steps For Companies

Right now, large and medium-sized companies are being urged to prepare to take advantage of the wider fund-raising opportunities and alternatives to bank financing that are developing by obtaining a credit-rating from one of the international rating agencies.

Credit rating is a government requirement for GEL bond issuance, and, as G&T points out, international agencies Fitch, S&P and Moody's and the European credit rating agency Scope, are possibilities--Fitch for one will adjust its fees to company scales.

Other requirements, once a bond is issued, include audited financial reports for the last two years, and display of the reports on the company's website.

"The international credit rating allows corporations to be evaluated according to internationally accepted credit rating standards.

This is very important for Georgian corporations, as it is a very strong step towards becoming more transparent organizations with strong corporate governance," said Irakli Elashvili, Managing Director of TBC Capital.

This would help bring them up to a standard that can attract the attention of international investors.

Of course, most of this is new to the majority of Georgian companies, but local expertise is also gradually improving, say the accountancy firms.

As yet, few companies have appropriately trained people in Treasury departments who are aware of the evolution of Georgia's financial markets, and most rely on information and offers from the banks.

The EBRD et al, and the credit rating agencies, however, will bring in in experts to help train. There is also a vast amount of information online, and the banks are increasing their services.

International interest is growing, and at the same time demand from the large corporations means "the need for sophisticated investment banking products and services is becoming increasingly prominent," TBC Capital's Elashvili said.

While the government program may sound like a formidable one, KPMG also says that there is "growing appreciation among companies of the funding opportunities opening up."