Issue 5, 2018. October-November


New Deal to Strengthen Georgia's Financial Market

Six large Georgian companies have signed a deal with Clearsteam Banking to handle corporate bond transactions. Brokers say the deal is a milestone for Georgia's financial market.

Sally White

Georgia has taken an important step in the opening up of its financial markets to foreign investors by signing a new deal to handle corporate bond transactions. The move sounds boringly technical, but it is a vital one to give foreign bond investors confidence that all Georgian asset administration will be up to international standards. Without that assurance, major international funds won't invest.

Hopes are now raised of a "considerable" increase in foreign money flows to Georgia's capital market, according to leading players. The admittance of corporate bonds issued by six major Georgian companies to the settlement, custody, and asset services carried out by Clearstream Banking is an new milestone. Clearstream Banking is a subsidiary of Deutsche Börse Group, but with operations internationally and links to markets worldwide. This milestone follows the admittance to Clearstream systems two years ago of Georgian government bonds and was made possible by Clearstream's indirect link with the Bank of Georgia as a sub-custodian and cash correspondent. Describing its role, Clearstream states, "When assets are traded, both parties must be sure they will receive their part of the transaction. Given the complexity, speed and quantity of assets involved, a fast, secure and trusted third-party is absolutely essential for settling transactions."

Clearstream ensures that cash and securities are promptly and effectively delivered between trading parties. It also manages, safekeeps and administers the securities that it holds on behalf of its customers. Over 300,000 domestic and internationally traded bonds, equities and investment funds are currently deposited with Clearstream, and it has 2,500 customers in 57 countries. The Georgian companies whose bonds qualify are M2 Real Estate, Georgian Leasing, Nikora, Silknet, Georgian Leasing and Microfinance Organisation Crystal. However, George Paresishvili, CEO of the Georgian Stock Exchange, expects more to follow. "With an already strong pipeline of new publicly listed corporate bond issues, we expect their number to grow even further following their inclusion in the Clearstream link." At Georgian brokers Galt & Taggart, Managing Director Otari Sharikadze regards this as "a very significant step towards developing the local capital market." "Many international institutions, including funds and other investment vehicles, are limited, or often not allowed, to have local custodians. When Georgian treasuries were first admitted to the Clearstream system, we saw a dramatic increase in interest from foreign big funds. Some 25 percent of the total trading amount was made by the foreign investors in the first year since admission," Sharikadze said.

"So, this move brings the potential investor pool to a whole new level and, for instance, a Frankfurt-based investment fund can easily invest in Georgian securities without even having an account in Georgia," Sharikadze explained.

"It is hard to predict when we will see the actual effect of this change, but in the long run there's no doubt that it will improve the market, its size and liquidity," Sharikadze added.

Paresishvili is equally confident that the impact on the corporate bond market will be considerable because it will create the right conditions for a wider range of investors. "Non-resident investors traditionally have been investing in Georgian government bonds denominated in GEL, partly because these bonds were Clearstream-able. Now, with this Clearstream news, we all hope that they'll start investing in GEL-denominated corporate bonds as well. In our opinion, they could potentially make up to 30 percent of this market over time," Paresishvili said.

"If you look at how these corporate bonds trade on the Georgian Stock Exchange (GSE), you'll see that they are not very liquid because of a scarcity issue-most investors hold them until maturity and never sell. USD denominated bonds are more liquid than GEL ones because their investor base is typically more diverse (high-net-worth individuals in addition to institutional investors, both local and international)," he said.

National Bank of Georgia Vice President Archil Mestvirishvili pointed out that there has now been a succession of measures to increase foreign interest in the Georgian bond market. "[. . .] we have recently undertaken a set of reforms to remove all tax-related risks; for example, non-residents are now exempt from capital-gains tax and withholding tax on coupons and dividends. By November, we will ensure delivery-versus-payment settlement for all corporate bonds and equities in central bank money."

Bank of Georgia CEO Kaha Kiknavelidze welcomed the move as "greatly facilitating" the administrative procedures for investors on time-saving and efficiency grounds.