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May 9, 2017 Central Asia and Caucasus bne IntelliNews Daily 9
EBRD's issues lari-denominated bonds to boost Georgian capital markets
Borsa Istanbul rally driven by relief and hope bne IntelliNews
Carmen Valache
Georgia, the small South Caucasus country of 3.9mn, has been the beneficiary of not one, but two lari-denominated bonds issued by the EBRD in the last year. On April 25, the bank issued the first lari-denominated Eurobond, worth GEL120mn (€46.7mn), on the London Stock Exchange. The move came after a GEL107mn public bond issuance on the Georgian Stock Exchange (GSE) in June.
Part of the bank's drive to develop lo- cal capital markets, the bond issuances are bound to spur investor confidence in the Georgian economy, George Paresishvili, GSE's CEO, told bne IntelliNews in a tele- phone interview. The privately-owned Geor- gian bourse has seen activity on it dwindle in the aftermath of the Russian invasion of 2008 and the economic crisis of 2009. While before 2008, the volume of trading on the stock exchange exceeded $100mn per year, it almost came to a halt in 2009 and has never fully recovered.
As such, the EBRD's bond issuances are particularly timely and necessary. Firstly, the domestic market issuance boosted trad- ing on the bourse, which stood at a mere GEL50mn in 2016, by offering local inves- tors the opportunity to buy bonds issued by a trustworthy, AAA-rated, entity. Secondly, the Eurobond issuance provides a solution to investors with an appetite for lari-denomi- nated securities, but reservations about buy- ing local bonds, Paresishvili believes.
"The EBRD's presence has been very important for the local capital market and private sector in general. The bank acts as a benchmark for the local market. Fur- thermore, the revenues from the Eurobond will be used to reinvest in the local market through loans to local companies that nor- mally have long maturity periods; so the Eurobond will likely increase the liquidity in the domestic private sector as well as peaking the interest of foreign investors," he explains.
That said, the EBRD's bond issuances are no silver bullet, for barriers remain to the development of capital markets in Georgia. By and large, Georgians do not yet have the culture to invest in stocks, preferring instead material investments like real estate or large consumer goods. The Georgian middle class,
while growing, does not have the sufficient investment capital yet to become a sizeable financier of the private sector.
Furthermore, the Georgian currency has had a chequered performance since 2014. Between 2014 and 2015, it depreciated by 40% against the dollar. Although it has some- what recovered since, more recent but short- lived waves of depreciation have continued to concern investors.
As a result, GSE does not yet offer suffi- cient financing potential to incentivise large Georgian corporations, such as TBC Bank or Bank of Georgia, to issue equity on it; the two lenders have chosen to go public in Lon- don instead.
At the same time, Georgia has become an attractive investor destination. Thanks to sustained growth rates of some 3% per year in 2015-2016 (which are expected to increase to more than 5% in 2018), investor-friendly policies, numerous free trade agreements, and close relations with the EU, but also with Iran, Turkey and Central Asian countries, Georgia is on a growth wave that could very well be reflected in its capital market soon.
One recent development that could speed up the process is, according to Paresishvili, the fact that the GSE and the Central Secu- rities Depository are working on a major up- grade of the trading platform, with the help of the central bank. "Once the upgrade is complete, it will provide much better access to non-resident investors to the local market. The upgrade will result in GSE using a state- of-the-art platform that will allow investors not only to trade stock, but also to lend, bor- row and do all the operations that can be performed on developed stock exchanges," he explains.
As for the EBRD, Paresishvili hopes that the bank will continue to support the devel- opment of Georgia's capital market by mov- ing into buying corporate bonds directly and thus acting like an anchor investor for the lo- cal market. "We have seen more issuances of local corporate bonds recently. In 2016, they represented 40% of the securities traded on GSE," he says.
Turkey has been wracked by political and economic turbulence, but Borsa Istanbul’s BIST-100 index rose 9% in 2016 and has continued rising this year, despite the con- troversial April 16 referendum on introduc- ing a powerful executive-style presidential system. Now the stock exchange is even planning its own IPO for 2018.
By April 28 the BIST-100 was up up 4.4% since the vote and 20% since the start of the year, including an all-time high of 93,400 points recorded on April 24. Turkish stocks are among the top five global equity market performers this year.
Turkey is the largest recipient of EBRD finance and back in 2015 the development bank showed its confidence in the coun- try’s sole stock exchange by acquiring 10% of Borsa Istanbul, where the listed shares have a market capitalisation of more than $200bn. EBRD said it was pursuing its strat- egy of helping to deepen Turkey’s financial markets. The NASDAQ, with a 7% stake, is another Borsa Istanbul shareholder, but a dominant 74% is kept by the government’s newly created sovereign wealth fund.
“The EBRD will work to improve the ef- ficiency and liquidity of Borsa Istanbul and help it become a leading exchange in terms of the number of listed companies and mar- ket capitalisation, reflecting the full potential of the Turkish economy,” EBRD First Vice President Phil Bennett said at the time of the acquisition.
The EBRD, which has invested more than €9bn in Turkey via more than 220 projects, has pledged to help with Borsa Istanbul’s preparations for a listing. The exchange could do with the IPO, given that its new list-
ings declined to five in 2015 and two in 2016 from 2014’s 13.
Things may be about to pick up, however. “We are holding talks with around 10 com- panies for potential IPOs planned for 2017,” Chairman Himmet Karadag said in April. Leading Turkish brand Mavi Jeans, a favour- ite with some international celebrities, in April applied to the Turkish Capital Markets Board (SPK) to pursue an IPO. Mavi is valued at up to $800mn and its listing could be the largest in Istanbul in years.
Borsa Istanbul has, meanwhile, been mulling exotic products to lure investors. Financial instruments based on unusual products including TV series, car manu- facturing projects and bridge projects may arrive. Listed Eurobond transactions may also be on the cards, while real estate bonds introduced in March are being promoted.
Saudi Arabia-based Islamic Development Bank (IDB) is one suitor that may be about to buy into Borsa Istanbul’s promise. It is consid- ering purchasing a substantial bourse stake within months. Turkey wants to turn Istanbul into a regional financial centre and promote Islamic finance. Efforts appear to be paying off. The share of foreign investors in publicly traded shares on the bourse was 64.5% in January.
Investors who bet on a ‘Yes’ in the ref- erendum and, amid a relief rally, bought into Turkish stocks, believing more effective eco- nomic management and a fired up economy are ahead, are looking to the government for further stimuli that can lock in the moderate economic recovery under way.
The country’s consumer and business sentiment indexes are rising and stocks may soon rally further.
AP Photo/Ibrahim Usta