Georgia: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
A particularly precarious emergence from the crisis
Georgia recovered from the recession in 2010 thanks to a substantial public investment effort, but the economy nonetheless suffers from weaknesses: GDP growth rested essentially on foreign direct investment (FDI), transfers of income from the diaspora, and international aid. But in 2010, FDI was in decline again, and the economy was thus entirely underpinned by the transfers, which increased somewhat, and especially by a massive international aid, which exceeded $1 billion, or 10% of Georgia's GDP. In 2011, the economy will remain dependent on the external environment and the official support. Exports could benefit from the high prices of metal and the strength of the Turkish economy, which have become Georgia's main trading partner since the Russian embargo on some food products (particularly wine and mineral water). Economic conditions in Russia could also spur domestic demand via transfers of income. But with FDI still far below its pre-2008 war level, it will not suffice to drive economic growth to any great extent. The rise of prices will thus remain moderate despite the inflationary trend observed since summer 2010.
Deficits financed by official aid
Weak sales abroad have resulted in an abyssal trade deficit and, consequently, a current account deficit that FDI only covers to a very limited extent. As a result, official aid is crucial to cover the economy's external financing needs. But the IMF confirmation agreement will expire in 2011, which could put pressure on the balance of payments. A new IMF aid package seems essential to avoid another exchange-rate crisis. As regards the fiscal budget, although major public investment projects tend to deepen public deficits, the balance of current government transactions is, however, in surplus, which attests to good control over public sector finances. The deficit is moreover partly financed by the official aide, which tends to limit refinancing risk to some extent. Public debt will thus likely peak at about 50% of GDP in 2011 before declining gradually thanks to the fiscal consolidation efforts implemented with the IMF. The banking sector still suffers, from a still high proportion of nonperforming loans and high exposure to exchange rate risk, with a high degree of dollarization of loans and deposits (around 70%). The currently high levels of capitalization would be jeopardized by a depreciation of the lari.
A still risky geopolitical environment
Tensions with Russia will remain high as long as President Saakachvili remains in power. Georgia is expected to veto the admission of Russia to the World Trade Organization, since approval would be tantamount to recognition of the independence of the two separatist regions, Abkhazia and South Ossetia. The Russian embargo is consequently also expected to persist. The risk of renewed hostilities between the two countries remains high, which tends to deter foreign investors notwithstanding the major reforms implemented by Georgia to improve the business environment. And the country continues to suffer from endemic corruption. The stranglehold obscure interests on some economic sectors tends to compromise legitimate business dealings.
Strengths
- Support of international financial community
- Strategic geographic position (transit point of gas and oil from the Caspian Sea)
- Policy favorable to foreign investors
Weaknesses
- Little economic diversification
- Structural current account deficits
- Persistent tensions with Russia linked in part to the recognition of the two separatist regions
- Substantial poverty and very high unemployment in rural areas