Georgia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Good resistance to the regional economic crisis (2014-2016)
- Agricultural, mineral, hydroelectric, and tourism potential
- International support, notably from the EU and the IMF
- Strategic geographic position (transit point for oil and gas from the Caspian Sea)
- Democratic political system
- Structural trade deficit, low diversification, and valuation of exports
- Significant poverty due to unemployment, under-employment, and inadequate training
- Low productivity of agriculture: half of assets, but less than 10% of added value
- Poor transport infrastructures
- Low levels of education and innovation
- Relations with Russia weakened by the situation in Abkhazia and South Ossetia
Investment and Exports are Strengthening Growth
Domestic and foreign investment, both in infrastructure and in other areas, should progress even more quickly. Private players are supported by European Union Association Agreements and FTAs, as well as by the USD 285 million three-year Extended Credit Facility granted by the IMF in April 2017. Public investment programs aimed at modernizing and developing the country’s infrastructure, such as the deep-water port on the Black Sea coast, are continuing. Exports (copper, wine, spirits, mineral water, ferroalloys, nuts, medicine) will benefit from the upturn expected in Russia and other countries in the region. Tourism revenue is expected to grow even further with the increased number of Russian visitors. Performance could be increased if an agreement is reached on the establishment of trade corridors with Russia across the secessionist regions of Abkhazia and South Ossetia. Household consumption is expected to grow moderately, while households are expected to benefit from the increase in immigrant workers’ remittances (10% of GDP) – approximately 60% of which come from Russia – and a drop in inflation linked to the rise in the local currency, the lari. In addition, credit is expected to experience continued favorable growth. Banks report only 4% non-performing loans and held up well against sharp depreciation in the lari, despite strong dollarization (60% of loans and 70% of deposits). Even so, the authorities have embarked on the subsidization of the conversion of dollar loans at a favorable exchange rate.
Start of Fiscal Consolidation, but Ongoing Massive Current Account Deficit
The entry into a new agreement with the IMF is expected to be accompanied by fiscal consolidation. However, reducing the public deficit will still require considerable effort. Even though current expenditure should be better controlled, public investment (electrical network, roads, sanitation, water supply, irrigation) remains a priority and will continue to grow (partially financed by multilateral loans). Nevertheless, the increase in the domestic product and the rise in the lari should limit the increase in debt, 83% of which (46.1% of GDP at the end of 2016) is held by foreign creditors, mainly public, multilateral and bilateral, at a fixed rate, in US dollars or SDR. Due to the concessional terms, the annual service of the foreign public debt represents only 5% of GDP.
The current account deficit will remain high in 2018. This is explained by the massive trade deficit in goods (26% of GDP in 2016) related to the narrowness of the productive base, imports of capital goods, and the low valuation of exported products. Tourism revenue, Azeri hydrocarbon transit revenue, and immigrant workers’ remittances ultimately limit the current account deficit to 12% of GDP. The financing of this deficit is ensured by foreign investment (12% of GDP), particularly in transport, real estate, telecommunications, and finance, as well as by foreign debt. Foreign debt represented 108% of GDP at the end of 2016, roughly evenly split between public and private debtors.
Ties with Russia, Which is Supporting the Secessionist Regions, and a Decent Business Climate
Tensions remain at the borders of the regions, supported by Russia, that have unilaterally declared their independence (Abkhazia and South Ossetia, with 160,000 and 50,000 inhabitants respectively). However, Georgia and Russia have resumed trade relations, the former being an important source of beverages for the latter, and the latter being the source of significant immigrant workers’ remittances and tourism revenue for the former. On the other hand, poor relations with the two secessionist regions are hindering land relations with Russia and complicating the management of the Enguri hydroelectric power station, with its dammed lake in Georgia and the plant in Abkhazia.
At the national level, Georgian Dream (RG), the party of President Guiorgui Margvelashvili elected in 2013, won the legislative elections of October 2016 with 115 seats out of 150, far ahead of his former partners in the previous coalition government and the United National Movement (UNM) of former president Mikheil Saakashvili (27 seats). This clear result may be favorable to the progress of reforms and cooperation with NATO and the EU. However, the concentration of power within one party may raise fears of abuse, as former Prime Minister and multi-billionaire Bidzina Ivanishvili remains very influential, even when compared to the current Prime Minister Giorgi Kvirikashvili. The draft of the new constitution has been criticized, as well as the draft electoral law intended to make more room for proportional representation, but which would not apply until 2024. A proposed ban on the purchase of agricultural land by foreigners could deter many foreign banks from lending to the agricultural sector. According to the World Bank, governance is poor with regard to rule of law and accountability of the authorities, but average for the fight against corruption, the quality of regulation, the effectiveness of public authorities, and the handling of insolvency.