Georgia, which neighbours Turkey and Russia, has shown remarkable economic growth since its independence. We have been invested in Georgia since 2010 and have holdings in the two biggest banks – TBC Bank and Bank of Georgia – which we believe offer favourable long-term prospects.
Since gaining independence in 2005 Georgia has become an attractive investment destination
Georgia has undergone a phenomenal transformation since its independence from the Soviet Union in 2005. Georgia still has an economic relationship with Russia, but its economic dependence is relatively low. Russia and Ukraine together account for only 10% of the country’s exports, 14% of imports, and just 4% of cumulative foreign direct investment (FDI) between 2004 and 2015.
A wide range of key macroeconomic variables indicate a strong and growing economy
GDP growth has averaged 5.1% for the 10-year period from 2005 to 2015 and FDI has averaged around 10% of GDP between 2006 and 2015. Although the debt-to-GDP ratio has grown from 9% in 2003 to 41% in 2015, it is still below global standards (the Eurozone is at 91% and the US is at 104%). Deposits have increased from 8% to 40% over the same period. In 2013, the World Bank ranked Georgia 9th for ease of doing business, a significant improvement from its ranking at 115th position in 2005.
In addition to these figures, the Georgian economy also boasts the following growth-supporting attributes:
- Large-scale privatisation
Privatisation played a significant role in the transformation process – ports, hospitals, organisations in the telecommunications as well as energy and distribution sectors and even public buildings were all sold and privatised. In the process, the number of public servants was reduced from 400,000 to 280,000.
- Strong international trade
- Because of its location – connecting the land-locked, energy-rich countries in the East and the European markets in the West – Georgia is a natural transport and logistics hub. As part of the transformation, extensive licences and permits as well as tariffs were abolished, which made it easier to import and export to and from the country and promoted trade.
- Its free trade agreements with the European Union, the Commonwealth of Independent States (CIS), Turkey, the US, Canada, Japan, Norway and Switzerland provides Georgia with access to a market of 900 million customers without customs duties. The country is also in the process of negotiating a free trade agreement with China.
- Ongoing tax reform
Georgia has only six types of taxes. The corporate tax rate is 15% and personal income tax is 20%. Tax reform is ongoing, and a new draft that is in the pipeline suggests that all retained and reinvested profits will be exempt from the 15% corporate rate.
- Growth in business and salaries
Salaries have quadrupled since 2004 and the number of registered companies has grown from 50,000 in 2003 to 400,000 in 2015.
- Increasing tourism revenues and development
- Inflows from tourism account for 14% of GDP, with approximately 7 million visitors expected in 2016. Eastern European holidaymakers are shying away from the once-popular resorts in Turkey and Egypt due to political tension and safety concerns. Tourists only require a visa for Georgia if their home country’s GDP per capita is lower than that of Georgia.
- The Georgia Tourism Strategy 2015-2025 is targeting 11 million visitors per year, similar to South Africa’s tourist figure. The strategy focuses on niche tourism products such as winter tourism, wine tourism, as well as medical and wellness tourism. Georgia Healthcare (a London-listed entity that was previously part of the Bank of Georgia Group) provides state-of-the-art medical facilities in its 35 hospitals, attracting cross-border patients. The government continues to invest heavily in developing Georgia’s ski regions, including resorts with casinos.
- Georgia’s film industry is receiving a boost from “Film In Georgia”, a government initiative providing financial incentives for film production in Georgia.
- Five mid-market hotel brands are expected to enter the country in the next three years.
Favourable socio-political factors support the strong economy
The country has one of the lowest corruption and crime rates in the world. This was achieved by following bold steps such as firing the entire police force of 40,000 people in one day. It ranks third on the Global Corruption Barometer, behind Denmark and Norway.
Georgia’s investment in renewable energy holds the potential for regional market dominance
The economy is based on significant hydroelectric power generation. Currently there are 40 power plants in operation and only 18% of the energy generated from these plants are used within the country’s borders. The rest is exported. Georgia’s investment in renewable energy is ongoing, with a current project targeting a capacity of 100 megawatts (MW) and another four medium-sized hydro power plants by 2019. A 1MW development costs approximately $1.5 million.
Georgia has the potential to dominate the hydroelectric market in the Caucasus region. Over 300 out of the country’s 26,000 rivers are considerable sources of electricity generation, offering a potential capacity of 6,000MW (Koeberg’s capacity is 1,800MW). Currently only 20%-25% of this potential is used, which makes current and future projects technically and economically viable.
Expected reform and developments all point towards continued growth
The outlook for Georgia remains very exciting. Capital market reform is surging ahead with the development of a local bond market and continued increase in stock exchange activities. Pension reform is under way with the introduction of a private pension system. In addition, deposit insurance is boosting private savings and enhancing trust in the financial system.
The building of a $2.5 billion deep sea port in Western Georgia has just commenced. This new facility will make Georgia a major hub on China’s Maritime Silk Road. The port will serve as the main gateway for imports for the approximately 17 million inhabitants of the landlocked Caucasus region and 146 million inhabitants of the Central Asian countries. Anaklia Development Consortium (ADC), who was awarded the contract to build the port, is a joint venture between TBC Bank and Conti International, a US infrastructure developer.
The Georgian economy remains strong and is on track to achieve GDP growth of between 4% and 5% over the next few years through its continued growth in exports and low debt-to-GDP ratio.
We are optimistic about our holdings in Georgia’s main banks – TBC Bank and Bank of Georgia
Bank of Georgia (BOG) has been a holding in our portfolios since we first started investing in Georgia in 2010. We have now also built up a holding in TBC Bank (TBC), the second largest bank in Georgia after BOG, following its global depository receipt (GDR) listing in 2014. TBC is a fully fledged, well-managed bank similar to Nedbank and FirstRand in South Africa, but with only one competitor. TBC ranks number one in Georgia in terms of retail deposits and its key valuations are a close resemblance of BOG’s valuations, as shown in Figure 1.
TBC’s expected listing on the London Stock Exchange will create new opportunities
Despite its 20% return on capital, TBC still trades at its book value. The main reason is simply a lack of liquidity – average daily trade is currently 35% below that of BOG. The same scenario unfolded when we initially invested in BOG. The problem was however solved when large founder shareholders sold their stakes once the bank moved from a GDR listing to the main market of the London Stock Exchange (LSE).
TBC’s move to the main market of the LSE is planned for October this year. Following the move, the bank should re-rate to a price to net asset value (P/NAV) ratio of 1.4x – which translates to a potential increase in their share price of 40% over the coming months. The premium listing will allow TBC to gain a broader investor base and open opportunities for inclusion in the FTSE Index. Combined with the strong and stable growth of the Georgian economy, we believe our investors will continue to reap the rewards of our holdings in TBC and BOG over the long term.
By Laura Ford