Georgia: A Sign of Change? Georgia Floats Its First International Bonds

In what officials portray as a testament to the success of economic reforms, the Georgian government has floated its first bond issue on international credit markets. Such fiscal action was unimaginable just a few years ago. Yet, despite a robust response by investors, the government lacks a specific plan on how to spend the money raised.

The official release of $500 million in Georgian government-backed Eurobonds came on April 8 in London. The issue was an instant success; demand was three times higher than expected, with requests for the bonds totaling $1.6 billion. The government, however, stuck by its commitment to cap the emission at $500 million.

The initiative's chief architect was Prime Minister Lado Gurgenidze, who formerly worked as a London-based investment banker for Putnam Lovell and ABN AMRO. Gurgenidze already had experience with floating Eurobonds. In early 2007, while leading the Bank of Georgia, a private institution, Gurgenidze oversaw the issue of $200 million in unsecured corporate Eurobonds.

Officials from the Ministry of Finance, the Ministry of Economic Development and the Prime Minister's Office routinely declined to answer questions about the emission, referring all enquiries to the prime minister himself. At an April 17 presentation in Tbilisi, Gurgenidze hit an upbeat note. "[T]his transaction has proven again that foreign investors . . . have a lot of trust in Georgia and a big interest in its economy," Gurgenidze said. He added that the Eurobond emission had "laid the groundwork for easier access for our companies to the international credit market."

A concept that is largely unknown in Georgia, and beyond the realm of most private investors in the West, Eurobonds are bonds denominated in a hard currency other than that of the issuing country. Among former Soviet states, only Russia, Kazakhstan and Ukraine preceded Georgia in issuing the bonds.

Within Georgia, most public information about the transaction has come from Galt & Taggart Securities, a brokerage firm run by the Bank of Georgia. (Bank of Georgia Chief Executive Officer Irakli Gilauri is the brother of Finance Minister Nika Gilauri.) The firm is not known to have an official role in the Eurobond deal.

Georgia's Eurobonds were issued with a fixed 7.5 percent interest rate, redeemable in five years – the lowest payback rate for a first-time Eurobond issuer in the past two years, according to Gurgenidze. Nearly half of the purchasers came from the United Kingdom; American investors made up the second largest group at 16.4 percent of total purchasers.

Georgia's Eurobonds were given a B+ rating by Standard & Poors, and a BB- rating by Fitch; both ratings indicate a considerable degree of risk, but assume that the government will be able to meet its obligations under current economic conditions.

Investment banks JP Morgan Chase & Co. and UBS brokered the deal. Georgia's Eurobond will be included in JP Morgan's Emerging Market Bond Index Plus.

How the Eurobond money will be spent remains uncertain. Gurgenidze initially indicated that the money would fund construction of natural gas storage units and of high-voltage electricity lines for use in exporting electricity to neighboring Turkey. But at his April 17 briefing, the prime minister indicated that feasibility studies have yet to be completed. The Millennium Challenge Georgia program will be looking into construction of gas storage units, Gurgenidze added, while the Energy Ministry and the Georgian State Electricity System are investigating the costs of upgrading Georgia's power lines.

In remarks to EurasiaNet, the prime minister's spokesperson, Avto Pavelnishvili, stated that a portion of the money raised most likely would be deposited in the Future Generation Fund and Stable Development Fund. The Future Generation Fund is meant to fund the eventual reintegration of separatist Abkhazia and South Ossetia with Georgia. The Stable Development Fund is meant to fund responses to emergency scenarios, including natural disasters.

As of yet, government officials have no concrete information about how much money from the Eurobonds will be set aside for these various purposes. That lack of detail has raised concern among some government critics.

A recent amendment to Georgia's Law on State Foreign Debt establishes that the terms for any foreign loan must first be agreed with parliament. The resulting agreement must be reflected in the state budget for the year in which the loan is taken. The Eurobond emission, however, will not be covered by this requirement; the amendment enters into force only in 2009.

"Thanks to this government-initiated amendment, very likely the government is going to take $500 million in credit [via the Eurobonds] on the European market