Georgia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Able to withstand regional economic conditions
- Agricultural, mineral, hydroelectric (almost self-sufficient in electricity) and tourism potential
- International support, in particular from the EU and IMF
- Strategic geographical position (crossing point for Caspian hydrocarbons)
- Small open economy sensitive to regional conditions
- Structural trade deficit, lack of industrial tradition, low diversification, and low value of export products
- Significant rural poverty against a backdrop of unemployment, underemployment and inadequate training
- Low agricultural productivity: the sector accounts for half the working population, but 9% of GDP
- Inadequate transport infrastructure hampers tourism and transit
- Low levels of education and innovation
- Population concentrated in the capital (1/3)
- Relations with Russia undermined by the situation in Abkhazia and South Ossetia
- Governance is poor in terms of anti-corruption, regulatory quality and government effectiveness, but average as regards the rule of law, government accountability and treatment of insolvency
Investment continues to grow strongly
Public and private investment (34% of GDP), both domestic and foreign, in transport, hydropower, tourism and agriculture is expected to remain strong. The association and free trade agreements signed with the European Union and China reassure private firms, as does the three-year USD 285 million Extended Credit Facility granted by the IMF in April 2017. Public investment programs in infrastructure to take advantage of the country's position and develop tourism are continuing. The other components of growth will be less robust. Exports (copper, wine, spirits, mineral water, ferroalloys, nuts, medicines) will have to contend with the poor health of the European, Russian and Turkish economies, which will not be offset by the strength of the other Caucasian economies. The 2019 restriction on Georgian wine (10% of exports) imposed by Russia (by far the largest importer) on “health” grounds may continue, as may the ban on direct flights between the two countries, which affects tourism (10% of GDP in 2018), since Russian visitors represent 21% of all tourists. Private consumption is expected to grow moderately. Expatriate remittances (6% of GDP), of which about 60% come from Russia, are flat due to the sluggish Russian economy. The savings rate is rising in line with the introduction of the new pension system in 2019. Credit to the private sector, with outstanding amounts rising from 58% to 66% of GDP between 2017 and 2019, has slowed owing to tougher prudential rules. As part of the "larisation" of the economy initiated in 2017 (63% of deposits and 56% of loans are still in dollars), the conditions for granting foreign currency loans have been tightened. The surge in inflation resulting from the impact of lari depreciation on food prices and the gap with the 3% target led the central bank to raise its key rate to 9% in December 2019.
In-line budgetary performance, but external fragility
Fiscal performance is in line with IMF requirements, while respecting the 4-Point Plan to increase labor productivity, take advantage of the country's location through infrastructure development, improve administrative efficiency and give the private sector a greater role in the economy. The deficit is small and contained. Revenues are being boosted by growth and improved collection. Outside education and social affairs, current expenditure is being reduced to free up more resources for public investment, which will continue to grow (financing is partly covered by multilateral loans). In this context, the debt-to-GDP ratio is expected to stabilize at around 40% (78% of debt is held by external creditors, mainly public, multilateral and bilateral). However, mismanagement of state-owned companies with significant commitments is a risk.
The current account deficit remains high. This is due to the massive deficit in trade in goods (25% of GDP in 2018) linked to the narrow production base, imports of capital goods and the low value of exported products, as well as to the remuneration of foreign investors. Despite tourism earnings, Azeri hydrocarbon transit revenues and expatriate remittances, foreign investment and external financing from both private and public sources are required to close the external accounts. External debt represented 95% of GDP (excluding intra-group loans) at the end of 2018. Public debtors accounted for 37% of the external debt. Official foreign exchange reserves stood at more than three months' imports.
Stormy relations with Russia, which supports the breakaway regions
Tensions persist at the borders with Abkhazia and South Ossetia. The two regions, which cover 20% of the country’s territory and have 160,000 and 50,000 inhabitants respectively, have unilaterally proclaimed their independence, with backing from Russia. Trade relations between Georgia and Russia are being held hostage to this situation. Poor relations with the separatist regions hinder land relations with Russia and complicate the management of the Inguri hydroelectric power plant, of which the reservoir is located in Georgia and the plant in Abkhazia. At the national level, the Georgian Dream (GD) Party has 105 seats out of 150 in Parliament, far ahead of the other parties. The presidential election of November 2018, the last to be held by direct universal suffrage, saw the French-Georgian candidate Salome Zurabishvili, supported by the GD, elected with more than 59% of the votes. However, in June 2019, violent demonstrations took place against the government, which was accused of breaking its promises to raise living standards, but also against the situation in the breakaway regions. With support from influential former Prime Minister and multi-billionaire Bidzina Ivanishvili, who took over again the presidency of the GD in May 2018, a new government led by Giorgi Gakharia took office in September 2019. That did not prevent new demonstrations on the grounds that the proportional representation for the next legislative elections at the end of 2020, promised by the new government, was abandoned. Voters are tired after the GD’s 13 years of power and distrustful of traditional opposition parties, namely the United National Movement, created by controversial former President Mikhail Saakashvili, and its offshoot, European Georgia.