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Bank of Georgia Group CEO on Deepening Local Currency Markets

Bonds & Loans speaks with Irakli Gilauri, CEO of BGEO Group about the company’s funding strategy, its first – and the country’s first – local currency Eurobond, and how other emerging market corporates can help deepen demand for local currency assets.

Nov 6, 2017 // 4:05PM

Can you give us a sense of the economic outlook for Georgia this year – particularly those sectors where BGEO Group has a foothold? What are some of the major factors in play?

The economy grew around 4.7% in the first 9 months, which is fairly impressive when compared to its regional peers. The growth was driven mainly by tourism – with the sector seeing roughly 30% growth year-to-date – and foreign direct investment. There are strong tourism flows from neighbouring countries – Turkey, Russia, Azerbaijan, Ukraine, Armenia – and we are also starting to see greater tourism from the EU – and Iran, which is a fairly new market for us.

The government reforms related to eliminating the profit tax on undistributed profits was impactful because it will incentivise internal corporate re-investment. Local and international investment was quite strong, so it would seem we are moving in the right direction. The local currency is appreciating and the Central Bank is continuing its foreign currency buying operations – we have strong FX inflows due to strong foreign investment and tourism growth. Overall, the outlook is positive. In 2018 we anticipate seeing around 5% growth, with tourism leading the way, so the outlook is very positive.

Over the past year, BGEO Group has taken some impressive leaps forward in terms of its debt financing evolution – first with the company’s utility subsidiary issuing GEL30mn in local currency bonds, the Group’s USD300mn Eurobond, then the Bank of Georgia’s GEL500mn Eurobond in May this year, a first of its kind. What were some of the challenges involved with these deals off the ground?

The country’s economy is performing well but the size of the economy is relatively small, as is the average size of the companies in the market, which creates a number of market access challenges – particularly for the capital markets. The price of debt and equity offerings need to be significant in order to attract liquidity into the market, one of the main drawbacks for smaller entities. That’s one of the reasons why we have such a broad investment holding company; simply put, size helps in attracting capital. We issued a USD350mn dollar Eurobond, which allowed us to pass on some of the proceeds to the [Bank of Georgia] and allowed us to invest in our utility business as well. We are aggregating the assets in order to make it more sizable for investors.

The GEL500mn deal was fairly unique in that it was the first time international portfolio investors gained any real exposure to the local currency. Despite our longstanding relationship – through the Bank of Georgia – with global investors, IFC’s acting as an anchor investor was critical for our ability to successfully build a book. It spoke to the organisation’s trust in the lari, the Bank of Georgia, and the country’s approach to fiscal and monetary policy.

International investor exposure to Georgia is quite low. To what extent does that influence how you engage with investors, and the education process involved?

We’ve been in the equity and debt markets for more than a decade, and throughout we have done a number of roadshows in a bid to educate investors. It is still challenging to overcome because the market is significantly under-researched due to under-exposure; more needs to be done, and it’s an ongoing process among our investor relations division and our senior executives. Disclosure from the government on the performance of the economy is fairly robust, but third-party opinions can go a long way; this is one of the benefits of participating in a IMF – the organisation provides a third-party opinion on the performance of the economy and the government’s fiscal reform efforts.

Georgia has a relatively small capital markets, even when compared with most emerging markets. What do you think needs to happen in order for the market to grow both deeper and broader?

There are a few key pillars here. The first is pension reform – what the government is doing here is very encouraging – will see the creation of employer / employee / government-matched system, and will create new sources of liquidity that could be directed towards the capital markets. The growth of large institutional investors will help increase the size of bids and help increase deal size.

Georgia is starting to emerge as an asset management hub for the region, which could benefit both Georgia and surrounding countries, and has certainly helped improve local liquidity; for your reference, local asset managers actually accounted for the lion’s share of demand for our utility subsidiary’s GEL30mn bond transaction. The country’s banking sector is also very strong, helping it attract deposits from the region – which could also create demand for new assets.

BGEO Group has worked with a number of multilateral development banks to enhance its credit and adopt best practice. If you look back 5-10 years and compare that with the current environment for local currency funding, do you get the sense there are a broader range of stakeholders able to step in to provide enhancements on transactions – and make local currency more attractive?

There has been considerable progress made over the past decade, but looking at developing the capital markets specifically, if we work to get more international financial institutions to come into deals at an earlier stage and enhance the credit or help with structuring, it could help attract institutional investors that may not have considered those transactions to begin with – especially when it comes to local currency funding. This would help local corporates print bigger and better deals, and widen the investment pool – and it’s an important area where IFIs can play.

Georgia is unique in terms of the performance of the local currency. Looking at the past decade, even if you consider the recent oil price crash-related devaluation, the local currency is still outperforming the US dollar in real terms – and average productivity in the country is starting from such a low base that over the next decade, it is hard to imagine a scenario where this doesn’t continue. One of the reasons why we managed to place our own lari bond is because investors are keenly aware of this trend. We have 35% of the population producing 9% of GDP – largely agriculture products – so there is a significant opportunity for outperformance of the dollar, which bodes well for attracting foreign investors. 

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