In January 2016 Georgia was plugged into the international capital markets when it hooked up to the international settlement and clearing system of Clearstream via its largest bank Bank of Georgia.

Already regarded as the most progressive country in the Caucasus, Georgia has widened the gap further as its stock exchange pursues a reform programme to create an international standard capital market that its companies and banks can tap to raise capital, as well as provide investment opportunities for things like domestic pension funds. Uniquely in the region, Georgia already boasts four companies listed on the London Stock Exchange (LSE) and after a hiatus caused by the global financial crisis and a short war with Russia, the market development has started again.

Russia carried out a similar reform in 2014 and saw the share of foreigners holding Ministry of Finance bonds (OFZs) soar to $20bn, or about a quarter of the total outstanding. Georgia’s market is a fraction of the size, but the Georgian Stock Exchange's (GSE) CEO, George Paresishvili, tells bne IntelliNews in an interview that the Clearstream move will hopefully make it easier for foreign investors to return to the local market.

GSE was set up in the early noughties as part of a USAID-funded drive to create capital markets in all of the countries of the Commonwealth of Independent States (CIS). “From the very beginning, the market has been a private affair with no government ownership or subsidies,” says Paresishvili. “It is owned by the members, mostly Georgian banks and local brokers.”

In some other markets in the region, especially Azerbaijan, the government uses the local exchange to issue and trade government paper, which means Baku’s exchange is larger than Georgia’s, where the government holds its own auctions and all of the secondary market bond trading happens over the counter (OTC). But that will change soon. “The GSE started by trading corporate bonds and equities, and the volumes and liquidity were understandably very low. However, with the change in government in about 2005 things improved and the market grew fast. Foreign investors ‘discovered’ Georgia, which became the next frontier market destination,” says Paresishvili.

The stock that really advertised Georgia to the rest of the world was Bank of Georgia (BoG), which Paresishvili described in 2005-2006 was for Georgia what Nokia was for Finland in 1970s, referring to the Finnish telecommunications company that became an global blue chip.

Over the first half of the noughties liquidity improved and turnover on the exchange rose to a peak of $100mn a year by 2007. Still small by international standards, the market was already liquid enough to coax more companies to list. This led to a string of IPOs, all of them organised by local brokerage Galt & Taggart, which was managed by Paresishvili at the time. “The market was pretty liquid in those days. I know that $100mn is small by international standards, but it was not bad in a $13bn economy,” says Paresishvili.

But 2008 was an annus horribilis for Georgia. In August it fought a five-day war with Russia over the breakaway regions of South Ossetia and Abkhazia, in a dispute that has still not been resolved. That autumn the collapse of Lehman Brothers in the US undermined the whole global economy and risky frontier markets like Georgia were the first to see the pullback of outside investors. “The war with Russia and the start of the international crisis was a double whammy for Georgia: investors left and took the bulk of the liquidity with them,” says Paresishvili. “For the next four or five years the market was pretty dormant with low liquidity and no IPOs.”

New broom

That has started to change in the last year. The owners of the stock exchange were unhappy with the moribund state of the market and the former management team was replaced in 2014. Paresishvili was hired as CEO and the new team launched a complete overhaul in an effort to kick-start business on the exchange.

The country’s leading companies have also been developing and two more international IPOs have taken place. TBC bank listed on the LSE in June 2014 and is now giving the BoG a run for its money. And Georgia Healthcare Group listed in London in November 2015 with a valuation of £218mn, raising £66mn that will be used to develop the business. The company was part of BoG, which was forced to sell by the regulator, although Bank of Georgia Holdings retains a 68% stake in the company.

Paresishvili has been actively continuing this theme of linking Georgia and the international capital markets. Amongst the first things he did on taking over was to bring rating agency Fitch Ratings to Tbilisi and hold a local roadshow to persuade more companies to get themselves rated. Two did and more are thinking about it, which has helped to revive the corporate bond market.

The latest initiative is to create a unified settlement platform. Currently, the central bank’s bonds are held in their own state-controlled depository while corporate bonds and equities are held with the exchange’s depository. This creates a problem, as the central bank will only accept its own bonds or those of international financial institutions (IFIs) issued in Georgia as collateral for repo operations. The idea is to unite the public and private settlement systems (although keeping the depositories separate), which would allow investors like banks to repo their corporate bonds and so increase the size and liquidity of the market, as well as extend the number of instruments that can be used as liquidity management tools by the financial sector.

A verbal agreement to create the new system was reached between the GSE and the Central Bank of Georgia in the first days of March and the new system is expected to appear this year.

“Since January 11, Georgian government and IFI bonds can be held and cleared through Clearstream and the plan is to add locally listed equities and corporate bonds in the near future as a way of attracting more foreign investments. “The main issue we need to deal with now is the volatility of the [national currency] lari,” says Paresishvili. “Since 2014 the currency devalued by 40%, although unlike in some of our neighbours this did not happen overnight. It was gradual but painful; investors want stability. But our bonds remain very attractive – the coupon on a two-year bond is paying 13.5% and the last 10-year bond issued was paying 15.5%, and this is appealing for the global macro hedge funds.”