Charles Robertson of Renaissance Capital -
We arrived in Tbilisi in the wake of Georgian Dream's surprise election victory on October 1, the party having won 84 seats in Georgia's 150-seat parliament and 55% of the vote. When President Mikheil Saakashvili's second term expires in 2013, new constitutional laws will take effect, giving parliament the majority of power in the country.
Of general emerging market interest are the surprising ways in which reforms have benefited the economy. As most already know, Georgia has aggressively improved its ranking in the World Bank's "Doing Business" surveys. Today it stands in 16th place: every country above it in the ranking is far richer. So how has the Georgian private sector been able to capitalise on this?
Georgia has captured the regional car market, not through production, but through the re-export of cars from Europe to the rest of the Caucasus. Since it only takes 15 minutes to register a car, and trading across borders has been simplified, Georgia is usurping Dubai. This business was worth $8m to Georgia in 2004, but $562m in the 12 months to August 2012, rising from 1% of total exports to 24%; and it has become Georgia's largest export business. We defy anyone to claim this could have been predicted.
Georgia has the best visa regime in the world, since it decided to remove visa requirements for citizens of nearly all countries that are richer than Georgia. Consequently, tourism receipts (personal travel receipts in the balance of payments) rose from $60m in 2003 to $343m in 2010, and to $663m in the four quarters to June 2012. Where else can Iranians and Israelis, Turks, Armenians, Azeris and Russians all drink, gamble and admire the sights together with such ease? Hotel construction and the travel sector are the beneficiaries.
Meanwhile, Azerbaijan's state energy company Socar has become the biggest taxpayer in Georgia, encouraged by the pro-business environment and Georgia's "strategic location". That phrase is grossly overused by foreign investment agencies across the planet, but for the energy-rich countries of Central Asia and the Caspian there is no alternative for exports to the West, except transit via Russia to the north or Iran to the south.
A step back for reforms?
The vote for Georgian Dream has been widely interpreted as a step back for, although not a complete reversal of, the country's business-friendly reforms. As we saw in New Zealand in the 1980s, political support for far-reaching reforms is often time-limited. Heading into this election, the challenge from Georgian Dream had already encouraged President Saakashvili's party, the ruling United National Movement (UNM), to tack left by offering basic health insurance to underpin the private system. Modest changes to the labour code and moving in favour of an anti-monopoly office are further modest examples of this.
A key speech to the business community by Georgian Dream leader Bidzina Ivanishvili on October 5 greatly reassured those we spoke to. He declared that his allies would be punished if they attempted to use the new political landscape to win advantage over existing companies and banks. He decried government intervention, praised the private sector and - aside from reiterating his support for agricultural investment - appeared to promise little change in the economy. Our base case is that Georgia will continue to thrive on the back of reforms already put in place, and that radical new reforms are unlikely.
To argue Georgia is not Ukraine risks invoking the "Spain is not Uganda" message recently texted, with less-than-perfect diplomacy, by Spanish PM Mariano Rajoy. However, it is important that Ivanishvili and incumbent Saakashivili were once allies, and both desired reform. We believe the US and EU are more likely to stay positively engaged with Ivanishvili than they were in Ukraine after President Viktor Yushchenko's defeat.
Nonetheless, we think near-term risks mean investors are likely to stay cautious on Georgia. Despite Saakashvili's acceptance of defeat, there is uncertainty on how relations between him and the new prime minister (probably Ivanishvili) will play out over the next 12 months. There is tension over the central bank governor. Investment projects may be delayed, at least for a few months. Potential upside for Georgia's economy exists if relations with Russia improve, but that would be surprising while Saakashvili is in office.
In the longer run, there is the question of whether "Ivanishvili's Georgia is Berlusconi's Italy." We still see this economy as a long-term buy (a simple comparison with Lebanon and Turkey suggests to us that the financial sector will boom), but near term, there has been too little price action in either Georgian corporate Eurobonds (yielding 6%) or key equities to suggest investors can buy into this at a particularly cheap level today.
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