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Georgia making clear progress on its reform agenda

MD Staff

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In 2018, Georgia confirmed its strong commitment to political association to and economic integration with the EU, as highlighted by its government’s high-level meeting with European Commissioners in November, and substantial progress in delivering on its Association Agreement commitments.

Today, the 3rd Association Implementation Report on Georgia was released. This report sets out the state-of-play of Georgia’s implementation of its commitments under the EU-Georgia Association Agreement over the past year, ahead of the EU-Georgia Association Council, to be held in Brussels on 5 March 2019. The report highlights that continued legislative reform and steady implementation of rules and standards in line with the Association Agreement are crucial to allow Georgian citizens to fully reap the benefits of this close relationship between the EU and Georgia.

“The European Union and Georgia have excellent relations that we further intensified over the past year. Since March 2017, more than 300,000 Georgian citizens have been able to travel visa-free to the Schengen area for short stays, and since 2009, more than 63,000 businesses and farmers have received loans. The European Union will continue to accompany and support the Georgian authorities in implementing important reforms under the Association Agenda, which provides priorities for our joint work until 2020 – reforms that are bringing more and more benefits to Georgian and EU’s citizens alike”, said the High Representative/Vice-President, Federica Mogherini.

The implementation of the Association Agreement continues to bring positive results to Georgian and EU citizens. The implementation of the agreed actions of our High-level Meeting back in November will provide further momentum to our relationship. The EU is Georgia’s largest trade partner and we will cooperate to further develop Georgia’s export potential. In September 2018, the first European School outside the EU was launched in Tbilisi, and Georgia is stepping up its participation in programmes such as Erasmus+, encouraging student and youth exchanges”, said the Commissioner for European Neighbourhood Policy and Enlargement Negotiations, Johannes Hahn

This 3rd Report takes stock of Georgia’s implementation of the Association Agreement and in particular the Association Agenda since the last EU-Georgia Association Council of 5 February 2018. Overall, Association Agreement commitments, including as regards its Deep and Comprehensive Free Trade Area, have been implemented in line with agreed timelines. Over the past year, Georgia has made progress in strengthening its democratic institutions, in the framework of the constitutional reform process and public administration reform. The Presidential elections were held in an overall competitive environment but also raised some shortcomings. Modest progress was made in reforming the justice sector, but challenges remain to consolidate the results achieved and to make further progress in this area. In that regard, it is noteworthy that the 4th wave of legislative reform was initiated upon establishment of the Parliament-led platform for judiciary reforms. Going forward it is important for the Georgian government to continue fostering an open dialogue with all political actors and civil society. In the past reporting period, Georgian authorities also continued their efforts to tackle the issues regarding irregular migration.

The report underlines the benefits for Georgian citizens of the country’s economic integration with the EU though the implementation of its Deep and Comprehensive Free Trade Area commitments. With the progressive approximation of technical regulations and standards with those of the EU, Georgia has been increasingly able to strengthen its participation in international value chains. Regarding external trade, the EU continued to be the most important partner of Georgia, with a 27% share in the country’s overall trade in 2017. Preliminary data for 2018 suggests a continuation of this trend. The opening of the EU market to new animal-origin products from Georgia was an important milestone in this regard.

Last year marked the 10 year anniversary of the conflict between Russia and Georgia. The European Union continues to firmly support Georgia’s sovereignty and territorial integrity within its internationally recognised borders. The European Union’s commitment to peaceful conflict-resolution remains as strong as ever, through the work of the EU Monitoring Mission in Georgia and the EU Special Representative for the South Caucasus and the crisis in Georgia. In June 2018, the Georgian Parliament adopted a legislative package “A Step for a Better Future” to promote peace and opportunities for the people in Abkhazia and South Ossetia. Georgia also continues to be an important partner of the EU in the area of security, the fight against terrorism and transnational organised crime. Georgia also participates in the EU-led missions and operations, which contribute to increasing the resilience of countries worldwide and strengthening the EU’s role as a global security provider.

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Post-Brexit UK will continue to offer significant opportunities

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PwC’s new report, Brexit and beyond: Assessing the impact on Europe’s asset and wealth managers, outlines the chief findings from qualitative interviews with senior executives at more than 20 global asset and wealth managers (AWMs) covering both the preparations for Brexit made by AWMs so far and their views of what the future holds for their businesses and the industry as a whole.

As the political and economic climate around Brexit continues to provide uncertainty across the globe, many AWMs feel confident that they are prepared for Day One following the UK’s departure from the EU – deal or no deal. But for them, this is only the beginning of the story. AWMs are now beginning to think hard about what comes next – above all, about how to best position their businesses for future growth and profitability.

“We received a clear message that the UK will remain a very important part of Europe’s finance ecosystem beyond Brexit. To this end, and to prevent further fracture, uncertainty and costs for business and investors, there is a strong desire among our clients for close alignment based on regulatory equivalence between the UK and the EU27,” said Andy O’Callaghan, Global Asset and Wealth Management Advisory Leader.

The report details the position of AWMs on Day One after Brexit, how they anticipate their operating models changing further in the months and years that follow, and how they see the long-term outlook for the industry as a whole.

Five key takeaways from the report:

More than three years after the referendum, there is still little clarity about the future relationship between the UK and the EU. While the EU’s equivalence regime offers a potentially powerful insurance policy against future uncertainty, AWMs may suffer collateral damage if trade negotiations become politicised.

Most AWMs we interviewed say they are ready for Brexit, helped by the interventions of Europe’s supervisory authorities, and should be able to continue operating largely seamlessly, even in the case of no deal. However, market and economic volatility is a concern.

The future for the UK’s AWM sector is now unclear. Policymakers and the AWM sector will need to focus on cementing the UK’s status as a centre of excellence for portfolio management while deciding the extent of tax and/or regulatory alignment is a viable option for driving funds growth.

EU27 centres such as Ireland and Luxembourg now have an opportunity to consolidate and grow their substantial funds industries, but fragmentation and domestic competition pose a potential risk to the industry.

EU27 AWMs are still unclear about the best way to access the lucrative UK market.

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Emerging East Asia Bond Market Growth Steady Amid Global Slowdown

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Emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019 despite persistent trade uncertainties and a global economic downturn, according to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.

“The ongoing trade dispute between the People’s Republic of China (PRC) and the United States and a sharper-than-expected economic slowdown in advanced economies and the PRC continue to pose the biggest downside risks to the region’s financial stability,” said ADB Chief Economist Mr. Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep financial conditions stable.”

Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Local currency bonds outstanding in emerging East Asia reached $15.2 trillion at the end of September. This was 3.1% higher than at the end of June. Local currency government bonds outstanding totaled $9.4 trillion, accounting for 61.8% of the total, while the stock of corporate bonds was $5.8 trillion. A total of $1.5 trillion in local currency bonds were issued in the third quarter, up 0.9% versus the previous three months.

The PRC remained emerging East Asia’s largest bond market at $11.5 trillion, accounting for 75.4% of emerging East Asia’s outstanding bonds. Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds.

A special theme chapter examines the relationship between bond market development and the risk-taking behavior of banks. The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions. This suggests bond market development can contribute to the soundness of the banking system.

An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018. It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.

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Job Quality in Cambodia is Improving, but New Policies Are Needed to Benefit from Global Markets

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The diversity and quality of jobs available in Cambodia is improving, yet new policies are needed for Cambodia to benefit from the opportunities available in future global markets, according to a World Bank report, Cambodia’s Future Jobs: Linking to the Economy of Tomorrow, released today.

Of the 8 million jobs in Cambodia, 37 percent are wage jobs, many of which offer higher earnings and more protections to workers. However, the other 63 percent of jobs remain more traditional. Such jobs on family farms or in household enterprises are weakly integrated in the modern economy and offer workers lower earnings.

“The diversity and quality of jobs in Cambodia has gradually improved,” said Inguna Dobraja, World Bank Country Manager for Cambodia. “But global trends, such as the growing Asian middle class, shifting trade patterns, and automation require that Cambodia re-think its jobs strategy as it advances to the next stage of export-led development.”

Foreign-owned firms have been significant contributors of higher quality jobs in Cambodia. By 2015, one-third of all wage jobs in Cambodia were in foreign-owned firms. During the period 2010-2015, the garments industry was the fastest-growing occupation sector, increasing its share of employment by 1.1 percent per year.

Domestic firms are more numerous than foreign-owned firms, but they do not contribute as many jobs. Domestic firms employ an average 8 workers, compared to 124 in foreign-owned firms. A key concern is ensuring Cambodian workers are equipped with the skills to compete with workers from other countries for jobs in foreign-owned firms. In 2016, 37.6 of exporters cited an inadequately educated workforce as a top business obstacle.

The report recommends a four-pronged strategy to securing more and better jobs in the future: diversify exports into higher value-added production; create a domestic business environment that supports local firms growth; strengthen linkages between the domestic and export sectors of the economy; and invest in workers’ skills and education. The report further details seven policy recommendations that would advance these strategic goals:

Diversify exports and foreign direct investment (FDI) into higher value-added value chains. Most current jobs are in low-value segments of global value chains. Simplifying processes, providing incentives to foreign investors, and creating quality assurance facilities will encourage diversification of exports and FDI into higher value-added value chains or segments of value chains.

Streamline procedures and reduce the costs of establishing and expanding small- and medium-size enterprises (SMEs), which have considerable potential to create jobs. Such policies would include reducing the cost of doing business for local firms, increasing firm contributions to worker skills development, increasing access to financing through grant programs and fiscal incentives, and providing support to firms to hire more workers.

Help household enterprises enhance their productivity and create better jobs. Household enterprises account for one out of every five jobs in Cambodia and this will grow with increased urbanization. Information technology, for example, can help household enterprises improve their basic business practices and access broader markets.

Support the development of links between exporting FDI firms and domestic input-supplying firms, by, for example, providing incentives to foreign firms to source their inputs from local SMEs, creating a directory of local suppliers with the capacity to partner with foreign firms, and establishing local supplier development programs.

Build a skills development system that will attract higher-value FDI and increase productivity across the economy. Cambodia’s workforce is getting by with only 6.3 years of education on average. Policymakers should focus on reforming today’s education system to help the tomorrow’s workers acquire the broad range of skills needed to work in a knowledge-intensive economy andengage enterprises in the design, financing, and support of a technical and vocational training system to serve today’s workers.

Promote efficient labor mobility and job matching by opening formal international migration channels and supporting programs that encourage circular migration, and by disseminating information about job opportunities inside and outside of the country to students, jobseekers, education and training institutes, and employers so that skills development choices are aligned with the changing labor market demand.

Regain macroeconomic independence and exchange-rate flexibility. US dollar fluctuations have a significant impact on Cambodia’s trade and commodities sectors, which are responsible for most of the country’s jobs. As Cambodia begins to export to a broader range of countries, macroeconomic and fiscal stability will help shield existing jobs from factors related to the US dollar.

“The success of Cambodia’s job strategy will depend on the participation and cooperation of stakeholders across the economy, not only policy makers and government leaders, but also entrepreneurs, investors, development partners, and, of course, workers themselves,” said Wendy Cunningham, Lead Economist and a lead author of the report.

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