Georgia's debt to the world

By bne IntelliNews May 20, 2011

Molly Corso in Tbilisi -

Sound fiscal planning is helping Georgia battle double-digit inflation and manage its large foreign debt, according to a May report by the International Monetary Fund (IMF). But critics maintain the high level of debt is compounding deep-rooted problems in the economy.

Over the past three years, concerns over a looming principal payment for a Eurobond due 2013 have stalked Georgia's government, especially since the bond was set to mature during a presidential election year, traditionally a period of high state spending.

In April, however, the Georgian government neatly circumvented the issue by selling a second $500m Eurobond. The proceeds were used to pay off the 2008 issue, postponing the real cost to the country until 2021. The government initially raised funds off a $500m, five-year, 7.5% Eurobond in 2008 in the months before the August war with Russia and the global financial crisis.

The decision to refinance the first Eurobond with a second offer - with a longer maturity period (10 years) and lower interest rate (6.79%) - was a coup for the government, Vakhtang Lejava, a chief advisor to Prime Minister Nika Gilauri, tells bne. He stresses that interest from investors in the second Eurobond was high. "The trust was there, I think that matters. Plus I think it is very prudent," Lejava says.

But critics like economist Davit Narmania argue that while conditions for the second Eurobond were good, that doesn't change the fact that the economy is not growing fast enough to support the weight of its foreign debt.

Weighed down

The economy, which registered 6.4% growth last year, has not fully recovered from its 2% contraction in 2009. Foreign investment in 2010, $553m, was a fraction of the $2bn the country received prior to the crisis in 2007. Georgian Economy Minister Vera Kobalia told Reuters on May 5 that she expects foreign investment to double to $1bn this year, with the energy and tourism sectors leading the way.

Exports also remain a problem; Georgia's highest export is the re-export of new and used cars, followed by ferroalloys and scrap metal.

By Narmania's estimates, at the end of 2011, 47% of Georgia's GDP - an estimated GEL9bn - will be in foreign debt. The economy is forecasted to grow 5.5% this year. "Honestly, [the second Eurobond] is not that bad of a step - but also not that great," Narmania says, noting that the debt has been postponed, not eliminated.

He notes that with the country's jagged growth history, poor investment inflows, high trade deficit and double-digit inflation, the economy has not rebounded enough to support a large foreign debt. "We have growth in the economy, but that is not sustainable growth... We have, very often, shocks to the economy and due to that there is economic growth but not stable growth."

But Lejava shrugs off concerns about the size of the debt. "Of course, if we are in the ideal world we can judge that you have to repay your debt and have zero debt," he says. "But business does not work like that. They need to be leveraged and governments also don't work like that."

Lejava adds that the government's policy of economic openness and flexibility has "saved it" from the worst of the financial crisis and post-war shocks. And, he says, the country's foreign debt is financed at a low annual rate, at an average of just 2.3%.

Edward Gardner, the head of the IMF mission to Tbilisi, tells bne that Georgia's current account deficit remains a concern, but not an immediate one. Fitch estimates that the current account deficit came in at 10.5% of GDP in 2010, down from 11.3% in 2009 and an average of 19.2% during 2006-08.

Gardner notes that a debt level of around 40% of GDP is not "inordinately high" and the second Eurobond is a "one for one" - basically a refinancing mechanism. Rolling over Eurobonds, he adds, is common for governments. "I don't think there is any concern with this level of debt as long as there is a process to bring it down very slowly over time," he says. "What I think the government is looking at and talking to us about is a fiscal plan over the next couple of years that insures that the debt does not continue growing over time, but starts going down."

Inflation, officially reported at 13.5% in April, should go down this year, he says, since it is due to international high food and fuel prices, not bad fiscal policy.

Narmania, however, stresses that better debt management is imperative to turn the newest Eurobond liability into a mechanism to create sustainable growth, not just refinance the country's debt burden. "The government needs to prepare a good public debt payment system - when they need pay, how much and [steps], so they don't take on more debt," he says. "When they take some, they need to use it to pay for those things that stimulate growth in the economy."

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