Monica Ellena in Tbilisi -

Since joining the European Bank for Reconstruction and Development (EBRD) in 1996, Bruno Balvanera’s work has been much about private sector development in Russia and the rest of the former Soviet Union. The Mexican banker, who has headed the EBRD’s South Caucasus office since 2013, thinks small and medium enterprises (SMEs) are “essential” to take the economies of Georgia, Armenia, and Azerbaijan to a new level. Every year the bank provides more than €1.5bn to develop SMEs across its region of operation.

“[EBRD] is not only providing financing directly, in coordination with, or through the local banks,” he says, “but more importantly it is providing technical assistance to the companies, to enhance their skills, competitiveness, productivity, and the investment climate.”

Trust your currency

In early May EBRD announced that it would issue its first bond in Azerbaijani manat by the end of the year. That followed local currency-denominated bonds in Georgia in March 2014, and in Armenia in January 2015. Other IFIs – the International Finance Corporation (IFC) and the Asian Development Bank (ADB) – followed with Georgian lari-denominated bonds in February, a sign of the need for local financing.

“We are working right now with the [Baku] authorities to create the appropriate legal and regulatory framework [because] it is very important that our bonds are placed in the market at the same [conditions] as the government’s, not to create an unfair market between the two instruments,” remarks Balvanera.

The aim is to curb high dollarisation rates, which stand at over 60% in the three countries, and to encourage borrowing in local currencies, which have been caught by a sharp devaluation, squeezing already meager household savings across the region.

Lack of trust is creating a vicious circle: customers do not want to keep deposits in their currency, so banks end up not having local currency to lend to their clients.

“Banks are already extending the maturity so that companies can pay back, but the reality is that over time, they will have to pay more in local currency, (…) and this is where we intervene.”

“We probably did too little, too late but we were starting to go on that road [when the devaluation hit].”

The other target is to develop or strengthen local capital markets, “to offer additional products, to create liquidity, to sophisticate a bit more the market”.

In Georgia, where the financial system is more developed and the banking system is “a jewel”, the next step is to support companies to issue bonds in lari or to create a derivatives market.

The star reformer

Georgia has come a long way since the 1990s, when civil war and economic chaos meant the country was almost a failed state. Worldwide, it is the 15^th easiest place to do business, according to the World Bank, and the 50^th least corrupt country, according to Transparency International. But that is still not enough.

“All these transformations have not translated into a significant increase of GDP per capita or life standards,” explains Balvanera. Georgia cut corruption and bureaucracy, and embraced the market economy. “Now it needs to undertake the second wave of reforms, to strengthen the institutions, to strengthen the regulators, to enable more private investment.”

The economy expanded by 4.7% in 2014. Dampened growth of 2.3% is forecast for 2015, as Russia’s economic downturn and falling oil prices are taking a toll on remittances, exports and tourism. Brussels’ watered-down rhetoric about Georgia’s path to Europe adds further gloom. But for Balvanera, the glass is half full, not half empty.

“I can understand people are disappointed,” he says, “but I would invite them to think positively as they are on the right road (…) they need to hold on and believe in themselves.”

But although Georgia’s location can be a challenge, it is also an asset. “It is a strategic route of Europe’s energy security,” as oil and gas from the Caspian Sea can reach Europe only through Georgia. “It is also a logistics hub for any company interested in the region, as Georgia has free trade agreements and free access to all its neighbours.”

Three countries, three priorities

Beyond empowering the private sector, investment in the three countries focuses on three sectors: Armenia needs more infrastructure, Azerbajian stronger banks, and Georgia more renewable energy.

For Armenia “it is essential to connect to the region.” After flirting with the European Union, Yerevan dropped the Association Agreement with Brussels and decided to join the Russia-led Eurasian Economic Union (EEU).

 “This economic area is also very powerful with lots of potential consumers,” says Balvanera. “Unfortunately Armenia does not have immediate borders with any of the countries [in the EEU], and it relies on Georgia to transit to get to this area.” Hence EBRD’s focus is on infrastructure, both in terms of transport and integration of electricity and gas networks. Armenia also faces regulatory challenges, having failed to reform its economy.

“Our message to Armenia has been, no matter to which economic union you have decided to be, you should continue to reform the agenda, you should tackle the inefficiency of the economy, in particular the monopolies, you should open the market for new players.”

In Azerbaijan, his focus is on the highly concentrated banking sector as low banking penetration – about 34% of GDP – puts the country far behind its peers. SMEs have little access to bank loans, as there is no centralised credit bureau and banks prefer to engage in large corporate lending or state-led project finance. “It seems an area that still has been kept protected.”

Water and wind are the resources that can drive Georgia’s development. In March IFIs mobilised $250mn for the biggest-ever privately owned hydropower plant in the country, bringing together India’s Tata Power and Norway’s Clean Energy Invest, while in early May the EBRD signed an initial agreement to support Georgia’s first wind park.