Georgia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Able to withstand regional economic conditions
- Agricultural, mineral, hydroelectric and tourism potential
- International support, including from the EU and IMF
- Crossing point for Caspian hydrocarbons
- Democratic political system
- Small economy sensitive to regional economic conditions
- Structural trade deficit
- Significant rural poverty
- Low agricultural productivity: the sector accounts for half the working population, but less than 10% of value added
- Inadequate infrastructure hampers tourism and transit
- The situation in Abkhazia and South Ossetia is undermining relations with Russia
Investment Continues to Grow Strongly
Public and private investment, 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 offer support for private-sector firms, as does the Extended Credit Facility of USD 285 million over three years granted by the IMF in April 2017. Public investment programmes to upgrade and develop the country's infrastructure, including construction of the Anaklia deep-water port on the Black Sea, are continuing. Exports of copper, wine, spirits, mineral water, ferro-alloys, nuts and medicines should continue to benefit from strong performances by the Russian, Ukrainian, and other Caucasian economies, while metal and beverage exports will be hampered by the problems affecting the Turkish economy. Tourism revenues, which accounted for 18.4% of GDP in 2017, are expected to increase further as the number of Russian visitors goes up. Performances could improve if an agreement is reached on establishing trade corridors with Russia through the breakaway regions of Abkhazia and South Ossetia.
Private consumption is expected to grow moderately, even though households will continue to benefit from expatriate remittances (8% of GDP), about 60% of which come from Russia, tourism-related effects and moderate inflation. Credit to the private sector, with outstanding amounts rising from 55.3% to 61.4% of GDP between July 2017 and August 2018, looks set to grow more slowly as prudential rules are tightened. Despite the strong dollarisation of the economy, banks coped with the lari’s substantial depreciation in 2015 and subsequent bouts of weakness linked to movements in the rouble and Turkish lira. De-dollarization, which is being encouraged by the authorities, who can point to the credibility of their monetary policy and inflation control, remains ongoing: 55% of loans and 62% of deposits were still denominated in US dollars in September 2018.
A Laborious Fiscal Consolidation Process Coupled with a Persistent Current Account Deficit
The agreement with the IMF includes a commitment to fiscal consolidation. But reducing the government deficit is a laborious process: even if current expenditure is controlled more carefully, public investment (power grid, roads, sanitation, water supply, irrigation) remains a priority and will continue to grow (note that multilateral loans partly cover the financing for these investments). At the same time, domestic product growth should enable the debt ratio to stabilize, bearing in mind that 80% of debt is held by external creditors, most of which are multilateral and bilateral public creditors. Poor management of state-owned companies with significant commitments is a risk.
On the back of rising energy prices, the current account deficit will remain high in 2019, reflecting the massive trade deficit in goods (25% of GDP in 2017), linked to the narrow production base, capital goods imports and the low value of exported products, as well as outflows of foreign investment income. Tourism receipts, transit revenues from Azeri hydrocarbons, which make up 13% of GDP between them, and expatriate remittances ultimately limit the current account deficit to 10% of GDP. This deficit is financed by foreign investment (11% of GDP), particularly in transport, real estate, telecommunications and finance, as well as by external debt. Stripping out intra-group loans, external debt was equivalent to 98% of GDP at the end of June 2018. Public debtors account for 37% of the external debt.
Links with Russia, Which Supports the Breakaway Regions
Tensions persist at the borders with Abkhazia and South Ossetia. The two regions, which have 160,000 and 50,000 inhabitants respectively, have unilaterally proclaimed their independence, with backing from Russia. Despite this, Georgia and Russia have resumed trade relations, with Georgia providing an important source of drinks for Russia, and Russia being a significant source of expatriate transfers and tourism revenues for Georgia. Nevertheless, poor relations with the secessionist regions hinder land relations with Russia.
The Georgian Dream (RG) Party has held 115 seats out of 150 in the Georgian Parliament since the October 2016 elections. Commanding a far larger share than the other parties, the party no longer needs to seek allies to govern, as it did in the previous legislature. The opposition did not capitalize on the spring 2018 demonstrations, which led to the formation of a new government in July led by Prime Minister Mamuka Bakhtadze. Meanwhile, billionaire Bidzina Ivanishvili – the former Prime Minister, who continues to wield considerable influence – took over the presidency of the RG party in May 2018. Finally, in accordance with the new constitution adopted in 2017, which also requires the country to switch to a proportional representation system for the 2024 legislative elections, and to a parliamentary system, the October 2018 presidential election was the last to be held by direct suffrage. She saw the French-Georgian candidate Salome Zurabishvili supported by the RG elected with more than 59% of the votes. The opposition refused to acknowledge the result.
According to the World Bank, governance is poor in terms of anti-corruption, regulatory quality and government effectiveness, but average in terms of the rule of law and the treatment of insolvency.