Georgia: Where Switzerland meets Singapore?

In speaking to Georgia’s relatively rapid transformation since the Rose revolution of November 2003 (what will history coin Egypt’s?), The Economist noted last summer that “Georgia’s modernisation was vigorous, even brutal.  Gia Sulkhanishvili, a businessman and a former student of [philosopher Merab] Mamardashvili, says: ‘The government took an axe to the Soviet practices and destroyed the environment which bred nepotism, hypocrisy and idleness.’  The change is all the more startling when Georgia’s fate is contrasted with that of other former Soviet republics, including Russia. ‘As in Russia, there were laws in Georgia, but then there were informal rules which trumped them,’ says Mr Sulkhanishvili. ‘Those rules are largely gone.'”  While Silk Invest wrote several months later that the country is now “growing out of adolesence,” citing in particular the “geopolitical advantage” of its rail network which “forms a key section of the Transport Corridor Europe Caucasus Asia (“TRACEA”), forming the link which remains the shortest route between the Caspian and Black Seas,” this growth story cannot come soon enough for reformers who are anxious to make up for lost time and opportunity.  When the purported model is “Switzerland with elements of Singapore,” you know someone means business.

As is often the case rapid frontier growth can be best played through the financial sector; Bank of Georgia has slumped hitherto in 2011 (down 4% roughly after a 143% spike in 2010) but remains an attractive long-term story.  VTB Capital, an investment bank, notes for instance that the overall economy’s robust 2010 gross output (estimated at 6.5%) as well as a the firm’s 36% market share translated into a 19% YoY loan portfolio increase and a 39% YoY rise in loan demand last fiscal year–effectively a return to pre-crisis levels.  With growth likely slowing to around 4-4.5% in 2011 analysts there foresee a reversal from last year where corporate loan growth outpaced retail given the latter’s “low penetration ratio”.  Likewise, the inflow of corporate deposits (up 54% YoY) was approximately twice that of retail (which yield more); and though the resulting overall customer account increase of 58% puts a short-term pressure on net interest margins, said funding base “supports the bank’s further expansion in 2011.”  Finally, asset quality metrics continue to trend downwards: provisions declined to 7.0% of the loan book, from 8.3% in 3Q10 as NPLs dropped to 4.6% from 5.9%.  Add to this picture the spectrum of yet untapped investment banking and insurance segments–VTB notes that management sees Aldagi (the firm’s wholly-owned subsidiary and the country’s largest insurance company in Georgia) as “becoming more important as a result of the robust insurance market growth on the back ofsignificant underpenetration (according to state officials, around two-thirds of the population does not have insurance cover) with the major emphasis on medical insurance (which accounts for around 70% of services across the sector).