EurasiaNet Eurasia Insight - Georgia: A Sign of Change? Georgia Floats Its First International Bonds

EURASIA INSIGHT

GEORGIA: A SIGN OF CHANGE? GEORGIA FLOATS ITS FIRST INTERNATIONAL BONDS
Nino Patsuria 4/29/08

In what officials portray as a testament to the success of economic reforms, the Georgian government has floated its first bond issue on international credit markets. Such fiscal action was unimaginable just a few years ago. Yet, despite a robust response by investors, the government lacks a specific plan on how to spend the money raised.

The official release of $500 million in Georgian government-backed Eurobonds came on April 8 in London. The issue was an instant success; demand was three times higher than expected, with requests for the bonds totaling $1.6 billion. The government, however, stuck by its commitment to cap the emission at $500 million.

The initiative’s chief architect was Prime Minister Lado Gurgenidze, who formerly worked as a London-based investment banker for Putnam Lovell and ABN AMRO. Gurgenidze already had experience with floating Eurobonds. In early 2007, while leading the Bank of Georgia, a private institution, Gurgenidze oversaw the issue of $200 million in unsecured corporate Eurobonds.

Officials from the Ministry of Finance, the Ministry of Economic Development and the Prime Minister’s Office routinely declined to answer questions about the emission, referring all enquiries to the prime minister himself. At an April 17 presentation in Tbilisi, Gurgenidze hit an upbeat note. "[T]his transaction has proven again that foreign investors . . . have a lot of trust in Georgia and a big interest in its economy," Gurgenidze said. He added that the Eurobond emission had "laid the groundwork for easier access for our companies to the international credit market."

A concept that is largely unknown in Georgia, and beyond the realm of most private investors in the West, Eurobonds are bonds denominated in a hard currency other than that of the issuing country. Among former Soviet states, only Russia, Kazakhstan and Ukraine preceded Georgia in issuing the bonds.

Within Georgia, most public information about the transaction has come from Galt & Taggart Securities, a brokerage firm run by the Bank of Georgia. (Bank of Georgia Chief Executive Officer Irakli Gilauri is the brother of Finance Minister Nika Gilauri.) The firm is not known to have an official role in the Eurobond deal.

Georgia’s Eurobonds were issued with a fixed 7.5 percent interest rate, redeemable in five years � the lowest payback rate for a first-time Eurobond issuer in the past two years, according to Gurgenidze. Nearly half of the purchasers came from the United Kingdom; American investors made up the second largest group at 16.4 percent of total purchasers.

Georgia’s Eurobonds were given a B+ rating by Standard & Poors, and a BB- rating by Fitch; both ratings indicate a considerable degree of risk, but assume that the government will be able to meet its obligations under current economic conditions.

Investment banks JP Morgan Chase & Co. and UBS brokered the deal. Georgia’s Eurobond will be included in JP Morgan’s Emerging Market Bond Index Plus.

How the Eurobond money will be spent remains uncertain. Gurgenidze initially indicated that the money would fund construction of natural gas storage units and of high-voltage electricity lines for use in exporting electricity to neighboring Turkey. But at his April 17 briefing, the prime minister indicated that feasibility studies have yet to be completed. The Millennium Challenge Georgia program will be looking into construction of gas storage units, Gurgenidze added, while the Energy Ministry and the Georgian State Electricity System are investigating the costs of upgrading Georgia’s power lines.

In remarks to EurasiaNet, the prime minister’s spokesperson, Avto Pavelnishvili, stated that a portion of the money raised most likely would be deposited in the Future Generation Fund and Stable Development Fund. The Future Generation Fund is meant to fund the eventual reintegration of separatist Abkhazia and South Ossetia with Georgia. The Stable Development Fund is meant to fund responses to emergency scenarios, including natural disasters.

As of yet, government officials have no concrete information about how much money from the Eurobonds will be set aside for these various purposes. That lack of detail has raised concern among some government critics.

A recent amendment to Georgia’s Law on State Foreign Debt establishes that the terms for any foreign loan must first be agreed with parliament. The resulting agreement must be reflected in the state budget for the year in which the loan is taken. The Eurobond emission, however, will not be covered by this requirement; the amendment enters into force only in 2009.

"Thanks to this government-initiated amendment, very likely the government is going to take $500 million in credit [via the Eurobonds] on the European market � without agreeing to its terms with parliament and making it public," alleged Vladimir Papava, a member of the parliamentary Budget and Finance Committee and a former economic minister in former president Eduard Shevardnadze’s administration.

Prime Minister Gurgenidze dismisses such criticism. "All Eurobond-related details are built into the budget. There is nothing more transparent than this deal in our country," Gurgenidze commented to EurasiaNet on April 16. The amended state budget, however, only indicates 800 million lari (over $552 million) as the cost for the Eurobond transaction itself.

Budget and Finance Committee’s deputy chair, Zurab Butskhrikidze, maintains that the Eurobond transaction terms will also be covered in the government’s annual report, to be submitted to parliament in March 2009.

Paata Sheshelidze, an expert at Tbilisi’s New Economic School, questions how easily Georgia will be able to handle the $500 million in debt.

"Georgia has quite a huge external debt [over $1.8 billion] apart from this $500 million and cannot deal with it. I cannot understand the reason for the debt," he commented. Rather than shouldering the additional debt for development of export-ready power lines, Sheshelidze argued that the government should privatize the lines and allow private companies to handle the improvements. "[T]he government still lacks a coherent position on this," he asserted.

The Eurobond emission assumes steady economic growth over the next five years. In 2007, Gross Domestic Product expanded by 12.4 percent, according to official figures. The government has predicted a 7.5 percent increase for 2008.

Inflation is another consideration. In mid-March, the National Bank of Georgia reported the rate at 12.3 percent � a jump over the 10.9 percent rate reported in February. In response, the state-affiliated National Bank of Georgia recently topped up its key rate, the rate that can influence bank interest rates, by one percentage point. The government has stated that its goal is to shave inflation down to 8 percent for 2008.

For now, though, Gurgenidze is confident that Georgia will meet its obligations � the unresolved conflicts with breakaway Abkhazia and South Ossetia notwithstanding. [For background see the Eurasia Insight archive]. "Let those who either could not issue Eurobonds, or who are going to issue Eurobonds and are not sure whether or not they will be able to implement this kind of transaction, worry about risks," Gurgenidze told reporters on April 16. "As for us, we have already successfully gone through with the transaction and nothing threatens us."

Editor�s Note: Nino Patsuria is a freelance business reporter in Tbilisi.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

The views expressed in this publication do not necessarily represent the position of the Open Society Institute and are the sole responsibility of the author or authors.