Having recovered relatively well from the global financial crisis, external factors are once again threatening Georgia’s economy – although lease companies expect growth this year writes Paul Golden
With the support of the IMF, Georgia managed to overcome the dramatic slowdown of its economy in 2009. Growth last year was 4.8%, but the economy has since been hit by a combination of severe external shocks: the Russia-Ukraine crisis, the deepening recession in Russia and currency devaluations in trading partner countries.
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Last year, the World Bank estimated that Georgia would experience average economic growth of 5.5% over the medium term based on greater policy certainty, improved market access and strong structural reform implementation.
These prospects depended on a number of factors, including improved economic ties with the EU and the robust reform programme outlined in the Government’s development strategy, which is expected to support growth in private investment.
But more recent data paints a less positive picture. In January, output grew by only 0.5% compared to the same period last year and the IMF warns that while growth this year could reach 2%, this projection is subject to risks. The economies of many of Georgia’s main trading partners are slowing by even more and the depreciation of their exchange rates is hurting Georgia’s competitiveness.
According to company data released last year, Georgian Leasing Company is the second largest lease company in Georgia with 36% of the market, well ahead of Alliance Group but some way behind TBC Leasing with a 61% market share.
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By GlobalDataThe Georgian Leasing Company data valued the market at GEL76m (approximately $31.8m) in 2013, which is equivalent to 0.3% of GDP – compared to the eastern European benchmark of 1.67%. Transportation was the single largest segment, accounting for just over 19% of the total portfolio.
Gvantsa Gvichia, head of leasing at Alliance Group acknowledges that the Georgian leasing market is under-developed. "There are only a few leasing companies operating in the country and just three of those are focused on corporate leasing. We are the only non-bank owned, independent leasing company in Georgia that is offering all types of leasing services."
She says awareness of leasing in general has improved over the past year and that the competitiveness of the market has increased as a result of the emergence of a number of new players. The highest concentration of lease activity in Georgia is in the construction and infrastructure sectors, as well as healthcare and transportation.
"The political and economic upheaval in Russia has not directly affected the leasing market, but obviously it has had a negative effect on the overall economy," says Gvichia. "Yet despite the recent slowdown in economic growth in Georgia, the leasing sector is enjoying a positive growth trend. We see growth in the market this year and we believe this positive trend will continue into the next few years."
She refers to an improvement in leasing legislation since 2011, which has had a considerable impact on the development of the sector. "In addition, the government is introducing new legislative acts, which aim to further promote the leasing sector."
Nana Mikashavidze, CEO TBC Leasing acknowledges that the Georgian leasing market is influenced by reduced growth in the wider economy, which declined significantly in the final quarter of last year due to external shocks such as the Ukrainian crisis and decreasing oil prices. All the country’s major trading partners’ (Azerbaijan, Turkey, Armenia, Ukraine and Russia) economies have also suffered as a result of these two factors.
"However, leasing has continued to grow and transform into a sustainable industry. Companies with strong business models have maintained sustainable growth rates and healthy portfolios, even though there has been deterioration in quality due to the currency stress. We expect approximately 20% market growth in 2015."
Over the last 12 months a new international company (Mogo Finance, a Latvian based financial company) has entered the lease industry with a focus on auto retail market and the local leasing companies have started marketing campaigns to increase awareness of their product.
Two leasing companies have issued their first local bonds to raise debt capital. TBC Leasing placed $2m in bonds in the capital markets and Georgia Leasing Company launched another bond issue for $10m.
"The market is still quite underdeveloped," says Mikashavidze. "While companies grow sustainably, there is a lack of new players on the market and unutilised potential of operating leases and fleet products. Currently, bank loans remain a major competitive factor due to the lower interest rates the well developed banking industry can offer to clients."
She says the government has been supportive of the leasing industry since 2011, when it agreed to revise the legal framework to support growth of leasing activity. The leasing law, as well as lease taxation policy effective since November 2011, is based on the UNIDROIT Model Law on Leasing and was developed in close cooperation with the USAID-funded project EPI, the Business Association of Georgia, National Bank of Georgia, the Ministry of Finance and independent business experts Alan Leesmith and Rafael Castillo Triana with the co-operation of local independent legal and tax experts.
"The government of Georgia acknowledges the role of leasing as a tool to economic development and is open to improving the legal framework that can support the business development," adds Mikashavidze.
"Currently, there are government support programmes for agriculture and entrepreneurship development, where funds are allocated to promote agriculture and manufacturing by providing grant components as well as subsidising the major portion of interest rate. A leasing component is included in the programme scheme as a financing tool."
When asked which sectors of the market are performing particularly well, she refers to growing demand in manufacturing and production, significantly influenced by government programmes promoting investment in new production facilities.
"The medical sector remains stable, as does agriculture and services. Transport business seems to be most vulnerable to regional crisis – although the companies with strong business models have remained quite stable and have even grown, most of the small and medium sized transport companies are facing problems due to reduced demand as well as increased competition from regional players."
Leasing was added to the Georgian government’s ‘Produce in Georgia’ programme in November 2014 as an additional financial instrument supporting small and medium sized businesses in the purchase of fixed assets.
In November 2014, a co-operative agreement was signed between TBC Leasing, Georgian Leasing Company and Alliance Group Leasing. According to this agreement, the leasing companies set a maximum annual interest rate of 15%, of which 12% will be covered by the Entrepreneurship Development Agency (EDA) for the first two years.
If the beneficiary of a lease is a new enterprise, it is obliged to start production within 24 months after the release of the asset subject to lease. In the case of expansion of an existing business, the company is obliged to start production within 12 months and production must be maintained for at least two years.
Also in November 2014, the Black Sea Trade and Development Bank (BSTDB) announced that it was increasing the availability of financing to private businesses in Georgia with a $4m facility to TBC Leasing. The three year facility will be used to finance leases of production equipment and commercial vehicles to small and medium sized local companies.
"A stronger leasing sector will benefit Georgia’s economic growth by providing small businesses with reasonable funding sources for their investments at a time when they continue to face limited access to financing mechanisms," said Ihsan Ugur Delikanli, BSTDB president.
The $4m facility was the third leasing facility extended by BSTDB to TBC Leasing, bringing the total amount to $10m following previously utilised facilities in 2007 and 2011.
Various other organisations have worked to increase usage of leasing in Georgia. Through its USAID-funded support added value enterprise activity AgVANTAGE, non-profit organisation ACDI/VOCA has promoted leasing as a means of addressing the problem of poor access to long term financing in Georgia and improving access to agricultural equipment.
This initiative has enabled processors and producers to gain access to affordable credit to purchase modern equipment and processing lines to run their agribusinesses more efficiently and make them more productive. The project also provided technical assistance to Georgian leasing companies to implement limited lease portfolio and credit enhancement programs.
Alta Group CEO Rafael Castillo-Triana was one of the authors of leasing-related reforms to the Georgian Civil Code in 2011. He returned in May 2014 to provide training to help Georgian judges understand market based interpretations of leasing laws.
"In the last five years, our company has been focused on providing assistance to all relevant stakeholders in order to grow the leasing industry in Georgia. While we have been working with the international missions in reinforcing the legal and regulatory framework and understanding of leasing amongst private sector vendors and lessees, professionals in accounting and the law, regulators (National Bank of Georgia) and judges (High School of Justice), we are now launching a permanent advisory service to be offered to the leasing companies in Georgia to allow them to have access to best practices, introduction of equipment vendors and investors and other areas that will allow them grow."
Over the last decade, the Georgian economy has been one of the fastest growing among the countries of the former Soviet Union, observes Alan Leesmith, international director IAA-Advisory.
"Since 2003, broad and comprehensive reforms have been implemented, touching every aspect of the country’s life. Economic reforms were introduced in order to create an environment conducive to a more liberalised economy and the provision of sustainable economic growth, based on private sector development. Establishment of an attractive business environment led to significant inflow of foreign direct investment, facilitating high economic growth rates."
The signing of the Association Agreement with the European Union in June 2014 and the coming into effect of the Deep and Comprehensive Free Trade Area (DCFTA) in September were landmark achievements for Georgia.
The Ukraine has been one of Georgia’s largest trading partners for the past decade, so not surprisingly the recent instability in Ukraine and a general downturn in the region (in part due to falling oil prices) have had some effect, says Leesmith.
"Even though this has resulted in the value of the Georgian currency being reduced by 30% since the end of 2014, the leasing industry continues to grow with a 6.4% increase in the first quarter of 2015. Generally, the total value of goods produced in the business sector in 2014 increased by 12.8% compared to 2013 and represented 82% of GDP for 2014."
Another positive factor was the number of citizens employed in the private sector, which rose by 11,000 compared to the previous year. Government programmes continue to operate successfully, covering components of agriculture and enterprise development and simplifying access to funds for entrepreneurs.
Just four years ago it was difficult for any leasing company to operate successfully, recalls Leesmith. "There were a number of issues with the Civil Code, the Tax Code and other regulations which meant that leasing was positively discriminated against. There was an unrealistic allocation of risks and benefits between the parties to a lease and the law was oriented towards lessee protection, leaving lessors to take an unreasonable and uneconomic degree of risk in the whole transaction."
In addition, the taxation system positively discriminated against leasing and there were circumstances in which a lessor could find itself with a tax charge on profits that never existed. Following recommendations from Leesmith and Castillo-Triana, changes to legislation were approved by the Georgian Parliament in 2011.
"It took a while for the changes to have significant effect, but since then growth in leasing has improved considerably and targets are generally being achieved," concludes Leesmith. "Lessors are able to stand on their own feet as in other countries and with the changed perception of leasing as a viable business, lessors are now able to find funding from sources other than their parent company."
