Worried investors have Georgia on their minds

By bne IntelliNews September 15, 2015

Monica Ellena in Tbilisi -


A controversial law has stripped Georgia’s central bank of its supervisory role and transferred it to a separate body under parliamentary control, raising investor concerns about the independence of financial regulation at a critical time for the economy.

When President Ghiorghi Margvelashvili was forced to sign the bill into law on September 10 after parliament had overturned his previous veto of it on September 3, it ended months of controversy surrounding the legislation, which has been pushed by the ruling Georgian Dream (GD) coalition.

In an open letter in late June, leading international financial institutions called on Prime Minister Irakli Garibashvili to keep the banking industry under the oversight of the National Bank of Georgia (NBG), stating that the new structure would threaten financial sector stability and undermine prospects for sustained economic growth.

Slowing GDP growth, declining remittances and shrinking foreign trade, coupled with a sharp devaluation of the national currency, the lari, against the dollar, are all contributing to difficult times for Georgia. “Georgian banks may need to raise capital to strengthen their balance sheets [and] uncertainty created by legislative changes and upheaval of banking supervision could jeopardise investors’ trust and thus complicate this task. Banks would then have to deleverage, which would hurt credit and growth,” the International Monetary Fund (IMF), European Bank for Reconstruction and Development (EBRD), Asian Development Bank (ADB), and the World Bank warned the government in a joint letter in June

The parliament’s speaker, Davit Usupashvili, said on July 16 that the new regulations had been amended to put them in line with recommendations by international financial institutions like the IMF. However, the key principle of removing banking supervision from the NBG remained unchanged. Instead, the bill foresees the establishment of a separate Financial Supervisory Agency (FSA) with a seven-member board. The NBG governor and one more member of the central bank’s board will take two seats, while the five other seats will be occupied by candidates nominated by the government and confirmed by parliament.

If it ain't broke, don't fix it

Critics of the bill, including the country’s leading business associations, claim the decision is politically, rather than economically, motivated. Statements by one of the bill’s initiators, MP Tamaz Mechiauri, chairman of the parliamentary committee for finance and the budget, give substance to these claims, when he said that the central bank’s board members “do not reflect at all the interests of those forces which are currently in power”.

Observers are also dubious about whether the new institution will be better than the NBG at supervising the sector. “It is indeed an unconventional decision, especially in the regional context where central banks proved to be the most efficient and independent state bodies, and have contributed to increasing the confidence of both the general public and investors,” Oleg Kouzim, economist at Renaissance Capital, tells bne IntelliNews. “The NBG has contributed to creating a stable banking sector and it is still unclear how a new body would do a better job.”

Indeed, Georgia’s banks are one of the country’s biggest success stories, with a system that’s viewed as strong, resilient and well governed. That’s been largely down to the role played by the NBG, which so far has proved to be one of the most conservative central banks in the former Soviet space, demanding the most stringent levels of capital and liquidity.

As of September 1, 20 commercial banks were operating in Georgia, including 16 foreign-controlled banks and two branches of non-resident banks. The five banks with the largest assets constituted 78% of the total share of assets. TBC Bank and Bank of Georgia (BoG), both listed on the London Stock Exchange (LSE), are the main players in the sector, accounting for about 57% of total assets.

The performance of the shares of the banks since the controversy erupted shows how investors view the changes. “The valuations of all the Georgian banks are signalling investor concern with the politics,” explains Bruce Packard, a Berlin-based independent financial analyst and investor in BoG. “The Georgian economy should benefit from lower oil prices, but yet BoG shares are trading on below 8x consensus earnings, TBC’s shares are even cheaper on 5.5x. The UK stock market as whole is trading on 14x, even after the recent falls and the fact that mining companies make up a large section of the FTSE.”

Puppet master

So what’s drove the governing coalition to push the changes so hard? Lawmakers from Georgian Dream argue the reforms will help increase the “transparency” of the banking sector and its supervision, as well as increase “trust”.

But opposition parties reject this, with MP Khatuna Gogorishvili from the opposition United National Movement (UNM) pointing out how “it is unclear why [Georgian Dream] deem [the process] to be non-transparent now”. Instead, UNM and other opposition parties accuse the bill of being a tool for former prime minister Bidzina Ivanishvili to exert more control over the financial system. Ivanishvili, the country’s wealthiest man who is believed to be still pulling the government’s strings, owns Cartu Bank, one of the country’s leading lenders.

The government and central bank have also been at loggerheads since the lari started falling in value against the dollar last November. In 2014 the lari averaged GEL1.9 to the dollar, but dropped to GEL2.2 between January and June this year, and has further weakened with the central bank on August 25 allowing the rate to fall to GEL2.41 to the dollar.

In February, Ivanishvili accused the NBG’s governor, Ghiorghi Kadagidze (who was appointed by the previous UNM government), of not having intervened enough to support the lari’s value. However, Kadagidze retorted that draining the central bank’s hard currency reserves, which were just $2.5bn as of August 31, was “the wrong policy decision”. The IMF agreed, saying in a statement following a mission to Georgia in March that it supported the “NBG’s policy to refrain from intervening in the foreign exchange market and allow the lari to float”.

The president’s veto of the bill in July also added a new chapter to the growing friction between the former philosopher and the Georgian Dream government, on whose ticket he ran for office. The political brinkmanship, specifically with PM Garibashvili, has exploded into open warfare since the president decided to move into the Mikheil Saakashvili-era presidential palace against the wishes of Ivanishvili, who is the political mentor of both men.

Margvelashvili has been accused by the government of a lack of “gratitude,” while he has made thinly veiled criticisms of Ivanishvili for the opaque, behind-the-scenes way that the government is run. He has also used more than once his veto powers to make the point over controversial government-backed bills; last November he blocked a bill that would allow the Interior Ministry to retain its direct access to telecommunication operators’ networks. Like this time, the Georgian Dream coalition had enough votes in parliament to overturn the veto. The MP Mechiauri, co-initiator of the bill on financial supervision, has derided Margvelashvili a “[George] Soros-ian NGO-shnik” who is “getting onto our nerves with vetoes”.

Of course, for the media and public the regular spats that break out between the president and PM over their respective responsibilities – for example, who should address the UN General Assembly or inaugurate a sporting event like the recent European Youth Olympic Festival – is an amusing diversion. However, not so for investors, who are worried about the stability of the ruling coalition and what all the in-fighti doing for the investment climate.


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