Frontier Markets Country Snapshot: Georgia

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Patrick McDonald
6 years ago
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DRIEHAUS FRONTIER MARKETS STRATEGY APRIL 2016 Frontier Markets Country Snapshot: Georgia Last month, we had the opportunity to meet with Georgian Prime Minister Giorgi Kvirikashvili during his visit

He has continued to actively promote closer alignment with the West and pro-market reforms to drive foreign investment.

1 DRIEHAUS FRONTIER MARKETS STRATEGY APRIL 2016 Frontier Markets Country Snapshot: Georgia Last month, we had the opportunity to meet with Georgian Prime Minister Giorgi Kvirikashvili during his visit to the United States. Mr. Kvirikashvili who was formerly Georgia s foreign minister assumed the role of prime minister following the abrupt resignation of his predecessor in December He has continued to actively promote closer alignment with the West and pro-market reforms to drive foreign investment. Over the past 10 years, Georgia s economy has grown and diversified admirably, achieving a per capita GDP averaging 5% per annum, led by expansion across services (banking and tourism), manufacturing and construction (Exhibits 1 & 2). The International Monetary Fund is forecasting continued economic expansion through Exhibit 1: Georgia GDP per Capita ( F) Exhibit 2: Georgia GDP Composition by Sector as of

Georgia s healthy rate of productivity growth has coalesced with a conservative fiscal balance sheet and increasingly credible monetary policy to make Georgia an attractive investment destination

2 Georgia s healthy rate of productivity growth has coalesced with a conservative fiscal balance sheet and increasingly credible monetary policy to make Georgia an attractive investment destination within the frontier market universe. Debt-to-GDP has held relatively steady at roughly 40%, and average interest rates on public debt are well below peers at 1.9% achieved by leveraging bilateral or multilateral financing to receive below market interest rates (Exhibit 3). Inflation, which has at times been a problem for the country, looks to have stabilized, and its central bank is sufficiently confident in its ability to tighten monetary conditions that it has announced plans to lower its inflation target to 3% by 2018 from 6% in Exhibit 3: Debt-to-GDP Ratio (left, bars) and Average Interest Rate Renewing the Silk Road Georgia is increasingly styling itself as a hub for regional trade and investment. The country s stable, accountable institutions and business friendly regime have encouraged healthy foreign inflows, while its strategic geography and warm water Black Sea ports have helped it reemerge as a regional transit hub. This has facilitated the throughput of goods for its landlocked neighbors, including Azeri oil and gas, and a landing point for telecommunications infrastructure connecting Europe to the Caucasus region. Georgia is looking to capitalize on its strategic geography by building out a network of connective infrastructure, including new highways and railways, a deep water sea port at Anaklia, and an expansion of Tbilisi International Airport (Exhibit 4). To facilitate these infrastructure projects, the country is introducing a modernized public-private partnership (PPP) framework and working to develop a local bond market to accommodate an increased role for private investment in the country s infrastructure. In speaking with a major corporate investor in Georgian real estate and infrastructure, they made it clear that they have already seen improvements in their ability to structure commercially viable projects and in the availability of third-party funding. 2

Exhibit 4: Map of Key Transport Infrastructure Source: Government of Georgia Beyond physical connectivity, Georgia has also made great strides in improving

The country signed an Association Agreement (AA), including a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU) in 2014, and

The new administration is focused on building similarly productive ties with the United States, prioritizing the pursuit of NATO membership, and estimates

3 Exhibit 4: Map of Key Transport Infrastructure Source: Government of Georgia Beyond physical connectivity, Georgia has also made great strides in improving its economic and geopolitical connectivity across the world (Exhibits 5 & 6). The country signed an Association Agreement (AA), including a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU) in 2014, and expects to achieve visa liberalization with the EU this year. The new administration is focused on building similarly productive ties with the United States, prioritizing the pursuit of NATO membership, and estimates that an upgrade of the current treaty into a bilateral free trade agreement could triple the value of trade between the nations in short order. Furthermore, Georgia just launched negotiations on a free trade agreement with China. Exhibit 5: Export Structure (left) and Import Structure (Right) by Counterpart as of 2015, Galt & Taggart Research 3

Exhibit 6: Trade Balance Source: National Bank of Georgia Not Blown Off Course by Recent Headwinds Since the Rose Revolution in 2003, Georgia has overcome significant challenges to deliver steady

The country s robust growth of the past 10 years was interrupted by the Russo-Georgian War in 2008 and the resulting loss of separatist territories South Ossetia and Abkhazia.

4 Exhibit 6: Trade Balance Source: National Bank of Georgia Not Blown Off Course by Recent Headwinds Since the Rose Revolution in 2003, Georgia has overcome significant challenges to deliver steady progress in economic growth and development. The country s robust growth of the past 10 years was interrupted by the Russo-Georgian War in 2008 and the resulting loss of separatist territories South Ossetia and Abkhazia. Simmering tension in neighboring states has, at times, also hindered the productivity of the Caucasus region. Most recently, many of Georgia s key regional trading partners have been under pressure over the last year as a result of depressed commodity prices, which has presented headwinds for the Georgian economy over the course of However, displaying its characteristic resilience, Georgia s economy has quickly regained its footing and is now showing signs of recovery. Investing in Georgia Though listed equity investment options in Georgia are limited, we have found attractive opportunities in the banking and health care industries. We believe equities in both of these areas are attractively valued with growth prospects and returns often superior to global EM peers. The Georgian financial sector exhibits strong growth based on low but rising loan penetration (44.5% of GDP as of YE2014) with well contained nonperforming loans, which represent only 3.3% of total loans (Exhibit 7 & 8). Georgia has not seen a single bank go bankrupt since independence. Exhibit 7: Georgian Banking Sector Assets, Loans and Liabilities Source: National Bank of Georgia 4

Exhibit 8: Georgian Bank Nonperforming Loan Ratio Relative to Peers Source: World Bank The Georgian health care industry is characterized by a post- Soviet legacy of overcapacity in hospital

5 Exhibit 8: Georgian Bank Nonperforming Loan Ratio Relative to Peers Source: World Bank The Georgian health care industry is characterized by a post- Soviet legacy of overcapacity in hospital infrastructure and health care personnel. However, much of that capacity is in desperate need of modernization and consolidation, currently suffering from inefficiency and low utilization (<60%). Last year, we initiated a position in a company that is aspiring to address this issue by consolidating capacity, modernizing facilities and driving utilization through the development of a network of ambulatory clinics and pharmacies. With the top five players controlling only 40% of the total market and 36% of Georgian capacity in need of renovation or retirement, there is ample opportunity to execute on this strategy. The agenda of reform and economic cooperation being carried forward by Mr. Kvirikashvili s coalition should continue to drive productivity growth, increasing economic sophistication and support healthy investment flows for the visible future. We look forward to seeing additional investment opportunities emerge within the Georgian market. Until next month, Chad Cleaver Portfolio Manager Rich Thies Portfolio Manager Disclosures This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC ( Driehaus ) as of May 12, 2016 and are subject to change at any time due to changes in market or economic conditions. The commentary has not been updated since May 12, 2016 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this information. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. 5

Project ADC I TBILISI JULY 2018

Project ADC I TBILISI JULY 2018 GEORGIA - HIGH LEVEL DESCRIPTION Population (2018) GDP (2017*) 3.73 million US$ 15.2 billion GDP/Capita (PPP) (2017*) c.us $ 10,600 Real GDP Growth (2017*) + 5.0% Real GDP