INTERVIEW: Georgia's growing pains

By bne IntelliNews July 20, 2011

Molly Corso in Tbilisi -

With Georgia's economy crawling out of recession, newly appointed Finance Minister Dimitri Gvindadze is betting on the momentum of reforms and fresh financing to coax out more growth.

Gvindadze took the helm of the country's financial portfolio - including customs, tax and the Revenue Services - in June after former minister Kakha Baindurashvili stepped down. He comes to the job after successfully handling the country's latest Eurobond offering - a sale that rolled over "the bulk" of Georgia's 2008 Eurobond debt.

"This transaction strategically extended Georgia's maturity profile and established a new liquid benchmark for Georgia's corporate and quasi-sovereign borrowers," he told bne an email interview in July. "Establishing a good track record as an international borrower is of key importance. The implications here go well beyond the immediate needs of the issuing government... This is probably the best confirmation of the soundness of fiscal and monetary policies that are being pursued by the government."

Georgia's economy has steadily recovered since the double shocks of the 2008 war with Russia and then the financial crisis. After slumping into an 3.8% contraction in 2009, the economy grew 6.4% in 2010 and it's expected to grow 5.5% in 2011. The budget has increased $1bn since 2009, climbing to $5.955bn in 2011 from $4.916bn two years ago.

Foreign direct investment and exports were also hit hard during the crisis, but the $4.5bn of financing pledged to Georgia during the 2008 donor's conference has helped the government fund investment projects and other, anti-crisis programmes. The cost of the government's strategy, however, has been higher debt levels.

Rollover jackpot

The Eurobond deal was a move to finance the $500m debt the government took on in 2008; the new $500m bond rolled over the payment, originally due 2013, to 2021, relieving the stress on the budget and the state coffers.

The ratio of public debt/GDP is 40% this year, Gvindadze said, lower than a high of 60% in 2003, but still considerably up from the approximately 25% registered in 2007. "The level of public debt has indeed gone up. Yet we do not feel we are in any sort of a danger zone," he said. "We mainly borrowed to finance infrastructure improvement measures and thus to lay down the groundwork for enhanced future productivity... With the current pronounced rebound in economic growth, this ratio will now start moving down again. We have weathered the impact of the global economic crisis quite well, and we have a rather robust public finance framework."

Gvindadze has a unique insight to the debt: following the war and the donor conference, he handled negotiations on financing the $4.5bn in commitments. He said that over $2bn has already been paid, and the remaining $2bn is expected to be "processed" by the end of the year. "This means we still have some $2bn of readily available (committed yet undisbursed) donor assistance available for spending in the coming two to three years," he said.

The final portion of donor financing provides a cushion for the government as it continues its anti-crisis programmes and prepares for the 2012 and 2013 election cycle. It also provides security for the economy, Gvindadze notes, as well for as the country's investors. "This will keep providing low-cost stimulus to the national economy. The bulk of these funds are for infrastructure improvement measures (energy, roads, municipal and urban infrastructure, agriculture)."

Investors and businesses play a big role in Gvindadze's forecast for the economy's growth.

Over the past seven years, the government has implemented scores of reforms focused on attracting investment and new business to Georgia. The Finance Ministry unveiled its own set of reforms to simplify and streamline the tax system - and increase dialogue and trust between the government and the business community. However, relations between the two sides became strained by allegations that the tax authorities, and the financial police, were being too aggressive with punitive audits against businesses. Over the past several months, though, reforms at the finance ministry have brought in a new head of Revenue Services - the body that oversees the financial police - and a new ombudsman for businesses.

Gvindadze also stressed the efforts the government is making to help promote private sector-driven growth. "The end-beneficiaries [of reforms], are people who do business in Georgia, people who invest into Georgia. One of the key functions of this ministry is promotion of the business-government dialogue and cooperation."

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