Eight months after its launch, question marks surround the use of revenue from Georgia's much-touted Eurobond emission, the first such issue ever offered by the Georgian state. Financial industry observers criticize what they term a lack of transparency about how the $500 million in Eurobond revenue was invested, and what return the government actually made.
A robust response met the Eurobonds' April 8 emission, with demand for the bonds nearing $2 billion. The government limited the emission to $500 million, however. [For background see the Eurasia Insight archive]. On October 8, the Georgian government made its first interest payment of $18.75 million to bond holders. A second payment is due on April 15. The payments will continue until 2013.
Former Prime Minister Lado Gurgenidze, a career investment banker who was the driving force behind the Eurobond project, promoted the bond issue as a way to finance the construction of gas storage facilities and power lines that would enhance Georgia's energy security and, potentially, position the country for electricity exports.
Those plans, however, were later put on hold; $130 million from the Eurobond emission went to the Georgian state treasury, while another $370 million was split between two special non-budgetary funds, the Fund for Stable Development (related to economic development schemes for the breakaway territories of Abkhazia and South Ossetia, if they are reintegrated into Georgia) and the Fund for Future Generations, which finances responses to various emergency situations.
The National Bank of Georgia was assigned to manage the international investment of the Eurobond revenue that went into the two funds. The Bank told EurasiaNet that Eurobond assets from both funds were invested in AAA-rated securities, including both American and European government bonds, as well as with the US Federal Reserve Bank, and member banks of the European Central Bank. Investments were also made in securities in the Bank for International Settlements, an international organization that provides banking services for central banks, as well as in short-term deposits with "leading" commercial banks.
Tbilisi experts, however, are now debating whether the Eurobond's benefits are worth the $37 million annual cost in interest payments.
"If the Georgian government annually invested this $37 million of state budget-based money in small business development and agriculture, over five years it might bring [a] much bigger profit to [the] Georgian economy," said Dietrich Muller, a partner with Georgian Investment Group, a company that handles financial market transactions for some Georgian banks.
Muller characterized the Eurobond emission as "an unreasonable loan" with "uncertain goals" that will only increase Georgia's "still big foreign debt" by $500 million. Georgia's foreign debt currently stands at $2.49 billion, according to the Ministry of Economic Development.
Part of the problem for Muller and other Georgian investment strategists is that the government's plans appear to be evolving constantly. The August war with Russia changed the government's plans for the revenue once again. [For background see the Eurasia Insight archive]. Funds raised by the Eurobond emission were used to finance war-related expenditures.
Georgian Finance Minister Nika Gilauri told EurasiaNet that $130 million was spent in August alone on such expenses. He rejects criticism that the Eurobond emission was not worth the cost. "How could we have dealt with the August war if we had not had cash in the treasury?" he asked EurasiaNet.
The Ministry of Finance did not elaborate about the breakdown of expenditures, saying instead that the money was spent on unexpected "war consequences," such as housing for Internally Displaced Persons.
The remaining $370 million out of the $500 million Eurobond emission was transferred into the state budget to cover any possible deficit, if international donor funds had failed to arrive in Georgia by the end of 2008.
Two hundred and fifty million dollars in US government aid monies reached Georgia by December 1, however, according to Gilauri. The minister stated that the transferred Eurobond revenue will now be used as a leftover from the 2008 state budget and spent in 2009. All funds will be divested by the end of the first quarter of 2009, he said.
The government claims a 10-percent return on the invested $370 million, meaning that it should expect to place roughly $407 million back into the Georgian budget. Officials, however, would not elaborate on their investment strategy, or the results.
Muller, the Georgian Investment Fund partner, questions the statement's accuracy. Either the Eurobond revenue was invested in ironclad-safe securities for a maximum of 3 percent return, and the investment made a loss, or they were put into risky securities for a potential 10 percent return, he said.
"You cannot invest in non-risky state securities ranked by [an] AAA credit rating at more than 2 to 3 percent. There was approximately a 30 to 35 percent drop in capital markets since May [when the Georgian government placed the Eurobond revenue] and the crisis aggravated in America in August [when the Georgian government started to divest the funds]," Muller said.
Even if the government placed the funds in securities with less than an AAA credit rating, the timeframe since their investment would have been too short to realize such a gain, he continued."Due to the [global economic] crisis, selling securities became quite difficult, and if you want them to sell in [a] short period, you have to sell [at a] very low yield and [it would] be at [a] loss," he argued.
The National Bank of Georgia rejected the criticism, and affirmed that the government has, in fact, made a 10 percent return on the Eurobond investment.
Central banks have access to state securities that can draw a 10-percent yield or higher, said Giorgi Laliashvili, head of the National Bank's Foreign Exchange and Monetary Operations Department.
That affirmation came as news to Paata Sheshelidze, president of Tbilisi's New Economic School, a think-tank that promotes classic market economic theories. "It is impossible in developed western countries that central banks are trading securities only in the close circle of central banks and that no other supervisory body might monitor the process . . . . all central banks are required to report on transactions they made," Sheshelidze said.
Giorgi Paresishvili, head of Galt & Taggart, an investment bank owned by the Bank of Georgia [The bank's chief executive officer, Irakli Gilauri, is the brother of Finance Minister Nika Gilauri. Former Prime Minister Lado Gurgenidze served as chairman of the bank's supervisory board until his 2007 appointment as premier -- ed], said that without knowing all the details about the Eurobond investment portfolio, it is difficult to judge how much profit Georgia actually gained.
Sheshelidze agreed. "It is impossible to asses the investment's profit as well the authenticity of the National Bank of Georgia information until the National Bank of Georgia provides us with full bookkeeping data on the portfolio," he said. "I do not exclude the possibility of a 10-percent yield as such. I just doubt that in this case the National Bank of Georgia was not participating in speculative deals in international capital markets."
A 10-percent gain in the dollar's rate against the Georgian lari could explain the increase, opined one expert at the Georgian Investment Group, Davit Aslanishvili. The dollar currently stands at roughly 1.65 laris; at the time of the Eurobond emission, the lari was trading at 1.40 against the dollar -- an 18-percent increase.
The National Bank of Georgia declined to discuss Georgia's Eurobond investment portfolio in detail, and stated that the Finance Ministry had responsibility for Eurobond revenue allocation.
The Finance Ministry, in turn, referred a EurasiaNet reporter to ex-Prime Minister Lado Gurgenidze and to the state Chancellery. The Chancellery, in turn, referred the reporter back to the Finance Ministry. Gurgenidze walked away without commenting when asked about the Eurobond deal by a EurasiaNet reporter in mid-November.
Nino Patsuria is a freelance business reporter in Tbilisi.