Georgia: Risk Assessment
Business Climate Rating1
Worsening external conditions will affect the economy in 2012. The fall in European and Turkish demand will hit foreign trade, the contribution of which to growth will be negative. However, exports are expected to benefit from high gold and ore prices as well as from the dynamism of the Kazakhstan and Azerbaijan economies, important outlets for Georgian exports. Investment, however, will suffer from lower foreign direct investment in agriculture and industry by the European Union and the USA. Private consumption will remain the main contributor to growth, driven by remittances from expatriate workers in Russia and renewed credit expansion. Public spending, restricted by fiscal consolidation efforts, will be confined to investment in infrastructures. Manufacturing industry, tourism and communications will record good results, continuing the trend of 2010. Slower domestic demand, accompanied by falling raw materials and foodstuffs prices, will help bring down inflation, which is expected to come within the Central Bank's target (6%).
The financial position remains weak
Weak exports have led to a significant trade balance deficit and to a current account deficit that FDIs can only partially cover. Consequently, international financial aid is crucial for meeting the economy's financing needs. The IMF Standby Arrangement ended in 2011, which could put the balance of payments under pressure, especially since the first repayments to the Fund will have to be made in 2012. New assistance from the IMF, therefore, seems indispensable in order to avoid a new foreign exchange crisis. As for the budget, though investment projects have led to big public deficits, the State's current accounts are, for their part, in surplus, a sign that public finances are under control. Thus, subject to the granting of further aid by the IMF, public debt is expected to peak at 40% of GDP in 2012 before falling gradually thanks to fiscal consolidation efforts. The banking sector, finally, suffers from a still high level of non-performing loans and high exposure to exchange rate risk with dollarization of loans and deposits around 70%. Current high capitalization levels would be badly affected by a depreciation of the lari.
A still risky geopolitical environment
The Georgian regime is marked by strong concentration of power in the hands of President Mikheil Saakashvili. Brought to the leadership of the country after the "Rose Revolution" in 2003, which saw the ousting of the former president, Eduard Shevardnadze, Mr Saakashvili was re-elected for a second term in 2006. The Constitution forbids him to seek a third five-year term in 2013. However, several amendments made to the fundamental text in 2010, strengthening the powers of the prime minister, to the detriment of those of the president, suggests that Mr Saakashvili is counting on remaining in power by gambling on the victory of his party, the United National Movement (UNM). Mr Saakashvili is increasingly criticized for his very presidential exercise of power. The opposition could be galvanized by the candidacy of the influential businessman, Bidzina Ivanishvili, so much so that the victory of the UNM in October 2012 is not certain. Unrest concerning the ballot cannot therefore be ruled out. Externally, Georgia finally withdrew its veto on Russia's membership of the WTO in October 2011, implicitly recognizing the independence of the separatist regions, Abkhazia and South Ossetia. However, the risk of renewed confrontation between the two countries remains great, which tends to dissuade foreign investors although the country has carried out substantial reforms to improve the business environment. Corruption is, however endemic and the influence of certain opaque interests on the economy jeopardizes the proper conduct of business.
- Support of international financial aid
- Strategic geographical position (crossing point for oil and gas from the Caspian Sea)
- Favorable policy towards foreign investors
- Weak economic diversification
- Structural current account deficit
- Substantial poverty and very high unemployment in urban areas
- Persistent tensions with Russia