Georgia: 'Trade financing increased by 16.2%, factoring by 13%' in 2020


Georgia (Georgian “Sakartvelo”), with a population of 3.7m, lies at the intersection of Eastern Europe and Western Asia in the Caucasus region.

Vladimer Robakidze, Corporate Business Director, and Lika Dzneladze, Head of Trade Finance Division, JSC VTB Bank Georgia describe Georgian factoring and economic environment in the most recent edition of World Factoring Yearbook.

As such it has a deep and rich cultural history. Tourism, agriculture, viticulture and mining are among its key industries. The factoring market is relatively new, with the first products being launched in 2014.

Trade is an integral part of the country’s activities, and that trade could not flourish without trade finance tools, which in the main are factoring-based.

Over the last few years, it has been the policy of the local banks to actively facilitate factoring among their clients, and this was reflected in the factoring market’s financial results for 2019, which showed that Georgia recorded the highest growth of factoring turnover globally in that year: 389 per cent, reaching EUR 137m.  For 2020 we are estimating a factoring turnover of around EUR 155m which would represent an increase of around 13 per cent compared to 2019, thus illustrating the continuing development of the factoring market in Georgia despite the negative impact of Covid-19 and the decrease in economic activity.

Factoring penetration in GDP is increasing year by year, reaching 1.1 per cent in 2020, showing that the product is still at an incipient stage of development in Georgia.

FACTORING INDUSTRY ENVIRONMENT

Georgia is a small transitional market economy, a gateway between Europe and Asia on the historic ‘Silk Road’, trade route. The economy of Georgia is highly integrated with international markets and trade, which creates a good basis for the development of international factoring.

Georgia has customs duty-free access to a market of 2.3bn people (having free trade agreements with China, Ukraine, Turkey, CIS and EFTA and DCFTA countries as well as the EU), all of which favours the development of international trade. Georgia borders the Black Sea from the west, Russia from the north, Turkey and Armenia from the south and Azerbaijan from the southeast. Economic and political events have led to the development of a whole network of regional trade routes along Georgia's borders, which in turn are linked to much larger, transcontinental trade routes.

According to the World Bank, the economy grew by an average of 5.3 per cent between 2005 and 2019. The COVID pandemic in 2020 led to an estimated 6.1 per cent fall in GDP. Growth is expected to resume in 2021. The inflation rate in December 2020 was 2.4 per cent (2019: 7.0 per cent).

The trade balance has shown a positive trend since the beginning of the year against the background of a decline in imports and a decrease in exports. According to GEOSTAT, (The National Statistics Office of Georgia) exports fell by 12.0 per cent year-on-year to USD 3.3bn in 2020, and imports declined by 11.7 per cent to USD 8bn. Consequently, the trade deficit reduced by 11.5 per cent to USD 4.6bn.

The Georgian national currency (the LARI) was devalued by 14.3 per cent during 2020, with the LARI exchange rate of 3.2766 against the USD as of 31 December 2020. The National Bank of Georgia (NBG) has softened the refinancing rate in stages from 9 per cent to 8 per cent in order to stimulate domestic demand which has reduced amid the economic downturn associated with the pandemic. At the same time, it has been actively intervening in the foreign exchange market to neutralise the carry-over effect of the currency depreciation on the inflation rate. Since the beginning of 2020, the NBG has provided USD 873.2m to the foreign exchange market. At present, the banking sector continues to finance the Georgian economy and to mitigate some of the decline in foreign direct investment and tourism revenues. By the end of 2020, credit investments increased by 19.8 per cent to LARI 6.3bn.

Georgia is one of the most business-friendly countries globally and holds seventh place in the World Bank’s 2020 ‘Ease of Doing Business Index’. According to Transparency International, Georgia has the lowest corruption rate in the region and international credit rating agencies (Moody’s Investors Service and Standards & Poor’s) rate Georgia as a stable country. The country has a sound macroeconomic framework, an attractive business environment, and robust public financial management practices that are expected to support the post-COVID recovery.

The Government of Georgia recognises the importance and role of SMEs in the country’s economic development and is committed to the further improvement of the business environment, in order to enable SMEs to develop and grow further. Banks as well are supporting local SMEs with a large offer of products and services. 

The total volume of credit provided to SMEs in 2020 increased by 18 per cent, despite the pandemic. As for the trade sector specifically, trade financing increased by 16.2 per cent in 2020, and factoring by 13% (estimated) and all this occurred against the backdrop of the pandemic. In financing trade, banks mainly use bank guarantees, letters of credit, standby letter of credits, invoice finance (discounting and factoring), working capital loans and overdrafts. Factoring is a relatively new product in the market, and therefore more effort is going into the promotion of this kind of finance than for other traditional banking products. Traditionally, customers have required other kinds of trade finance products, but banks are now reviewing the benefits of those other products for SMEs, and if they find that factoring is more suitable for a particular client then they will offer them that facility.

In the country, the normal payment terms between local companies are 30-60 days while for international trade, the average payment terms tend to be longer 60-120 days. The most used method of payment is open account.

To read the whole article and much more, order World Factoring Yearbook 2021 here.