Georgia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Tourism, agricultural, mineral, and hydroelectric potential (almost self-sufficient in electricity)
- Strategic geographical position between Central Asia, Russia, Europe, and Turkey (crossing point for the distribution of Azeri oil and gas from the Caspian Sea to Turkey)
- International support, notably from the European Union (EU) and the International Monetary Fund (IMF)
- Numerous trade agreements, especially with the EU and China
- Relatively good and improving business environment (obligation for companies to comply with IFRS, submission to parliament in March 2020 of bills on bank resolutions and corporate failures that would strengthen the protection of creditors' rights and insolvency and reorganization procedures)
- Small open economy sensitive to regional conditions
- Highly dependent on tourism (26% of GDP including direct and indirect activities, 28% of jobs, and 39% of export earnings)
- Low economic diversification, lack of industrial tradition (8.5% of GDP), and low productivity in agriculture (7%), which makes up 50% of the workforce
- Structural trade deficit and low-value exports
- Highly dollarized banking system (62% of deposits and 52% of loans)
- High poverty (17%) against a background of unemployment, low levels of education, an informal economy (53% of GDP), and a rural population (42%)
- Poor governance (corruption, politicized court system)
- Underdeveloped regional connectivity and transport infrastructure hamper tourism and transit
- Strained relations with Russia due to the situation in the self-proclaimed independent regions of Abkhazia and South Ossetia (20% of the territory, 210,000 inhabitants)
A recovery dependent on domestic demand
After growing solidly over the past decade, Georgia experienced the deepest recession in the Caucasus. While it initially stood out with effective handling of the pandemic, the trend reversed in September 2020 as the number of both cases and deaths surged. The strict lockdown from mid-March to mid-May 2020, including the closure of non-essential shops, fuelled a drop in private consumption (69% of GDP in 2019) and services (77% of GDP). This was compounded by a fall in expatriate remittances (10% of GDP), which were hit by economic conditions in Russia (60% of remittances), Turkey, and Europe. However, remittances began rising in June 2020, benefiting from foreign stimulus plans and becoming a growth driver for private consumption in 2021. They may be supplemented by measures to support vulnerable individuals, including the adoption in July 2020 of a law providing for minimum annual increases and inflation indexing for basic public pensions from January 2021. These drivers will be particularly important given the uncertainty surrounding the recovery of tourism. Despite being slightly mitigated by domestic tourism, tourist numbers fell by 76% year-on-year in January-August 2020. With borders still closed in November 2020, especially with neighboring countries that account for two-thirds of tourists, the sector will be able to count on the support measures in force since April 2020, such as VAT exemptions, which could be extended in 2021.
Public and private investment (34% of GDP) is expected to lose momentum, hurt by delays to major infrastructure projects, including the huge deep-water port and container terminal in Anaklia on the eastern coast of the Black Sea (USD 2.5 billion, 14% of GDP). The contract for this public-private partnership, which was signed in 2016, was suspended by the government in January 2020 for political reasons. It went to arbitration in July 2020, pushing back the opportunity to boost trade. The goods deficit narrowed in 2020. The decline in re-exports was offset by renewed exports of copper ores (14% of the total), alcohol (9%), and gold (3.6%). Imports (63% of GDP) fell by volume via machinery and equipment (22.5%) and by value via the decline in the oil bill (13%), which should continue to support the trade balance in 2021.
Lower oil prices will help contain inflation, which was driven up by food prices and the weak lari. The central bank was able to lower its policy rate (8% in September 2020), and the return of inflation in 2021 to its 3% target leaves the door open for further cuts to support credit to the private sector, which has remained robust thanks to government subsidies and guarantees for lari-denominated loans. Other measures, such as the temporary lowering of capitalization requirements, alleviated the banking system, whose fundamentals and profitability have strengthened in recent years (2.3% of loans were non-performing in August 2020).
Budget variance made possible by international financing
The 2020 stimulus plan (7.5% of GDP) caused the budget deficit to increase sharply. With the recovery, it should move closer to the 3% of GDP rule and resume the path of consolidation. It will be financed by domestic and external borrowing, including USD 913 million from the Asian Development Bank, the World Bank, the IMF, and the EU. These funds may go towards the USD 500 million Eurobond that matures in April 2021, but may also be used to ensure the sustainability of the public debt-to-GDP ratio. Although concessional in nature, the debt surged in 2020 and will remain vulnerable to lari depreciation (78% denominated in foreign currencies) and contingent liabilities of poorly managed state-owned enterprises.
The fall in tourism caused the structural current account deficit to widen. Any reduction in 2021 will be constrained by uncertainty over the recovery in this sector. Multilateral financing took over from FDI, causing foreign exchange reserves to edge up (USD 3.6 billion in September 2020, 4.6 months of import coverage). This will help contain lari depreciation, while the central bank sold USD 752 million in foreign exchange in January-October 2020. With multilateral financing, the external debt/GDP ratio swelled to 111% (excluding FDI-related loans).
A less stable domestic political environment
The legislative elections at the end of October 2020 saw victory for the party in power since 2012, the Georgian Dream-Democratic Georgia Party (GD-DG, 48% of the votes), followed by the former majority party, the United National Movement (UNM, 27%). Backed by growing support thanks to its handling of the crisis, the GD-DG won a narrow majority of seats (compared with three-quarters in 2016), allowing it to form a government on its own. At the end of June 2020 and after the agreement was reached with the opposition in March 2020, the electoral law was amended to increase the proportionally elected seats in parliament from 50% to 75%. The opposition organized demonstrations after the elections and protested irregularities such as vote-buying. While international observers recognized these issues, they declared the election to be generally free and fair. The GD-DG's third term is expected to see recurring demonstrations by a divided opposition.