Among in-the-know travellers, Georgia has been rising up the list of must-see destinations for some time. The small country, nestled between the Black Sea and the Caucasus mountains, is the birthplace of wine, has a unique language and alphabet, and is experiencing a culinary revival.

A growing number of investors are now waking up to its charms, too. For nearly two decades, the former Soviet republic has pursued ambitious economic and political reforms which have modernised the nation and won plaudits from international observers. “I was here 10 years ago and it is now a completely different country — both visually and in terms of development,” says Catarina Bjorlin Hansen, the European Bank for Reconstruction and Development’s (EBRD) regional director for the Caucasus. Its success in cutting red tape, liberalising the economy, strengthening institutions and weeding out corruption — which Ms Bjorlin Hansen says is now very low — has led to its recognition as a star reformer among development finance institutions (DFIs).

Pro-business, pro-investment

The government’s drive to make life as easy as possible for businesses pushed Georgia to seventh in the World Bank’s latest Ease of Doing Business rankings — within Europe, it trails only Denmark. It takes just one day to do hundreds of administrative processes, including registering a business or property. The 9.9% effective corporate tax rate is the third-lowest in the world, according to the World Bank and, in 2017, it introduced the so-called Estonian tax model, which exempts retained and reinvested profits from business tax. 

This business-friendly climate extends beyond low bureaucracy and taxes. “The government is very investment-minded, which is excellent in terms of its openness, in speaking with potential and future investors,” says Ms Bjorlin Hansen. Giorgi Pertaia, president of the Georgian Chamber of Commerce and Industry, describes it as “very easy” to meet senior government officials. “More so than in other countries in the region and Europe, the door is open,” he says. 

While reforms have boosted Georgia’s attractiveness as a business destination, they cannot fix one of the country’s major drawbacks: its population of just 3.7 million has limited appeal as a consumer market. However, the government is integrating the country into global value chains via an extensive and growing network of free trade agreements (FTAs) that give customs-free access to a market of 2.3 billion people — one-third of the world’s consumers. To date, it has struck FTAs with the likes of China, the EU, the UK, Turkey and the Commonwealth of Independent States. By enlarging the market, it hopes to lure companies wishing to capitalise on Georgia’s business climate and export its goods tariff-free.

“The way logistics work nowadays, the world is becoming very small. You don’t need to invest in a large market like Russia, for instance, to sell products there,” says Mr Pertaia. “In this sense, Georgia is in a very unique situation.” 

EU accession

While reforms and FTAs boost Georgia’s credentials as an international business platform, there is still room for improvement — particularly in the political arena. Concerns over judicial independence have prompted calls from Transparency International and DFIs to reform the court system and judge-selection processes. Opposition parties boycotted parliament for months following the ruling Georgian Dream Party’s disputed victory in last October’s national elections. It sparked orders to arrest an opposition leader, the prime minister’s resignation, and ultimately an agreement brokered by the EU which ended the stalemate in April. 

While the incident caused jitters among international observers, European Council president Charles Michel called the solution “a truly European way of resolving the crisis”. Indeed, European integration has been Georgia’s direction of travel for some time. The new generations favour English over Russian as their second language and, in January, the government announced it will apply for EU membership in 2024 — a move supported by 82% of the population according to recent polls. 

Georgia took its first formal steps towards EU accession in 2014 by signing the so-called Association Agreement, committing the country to align its standards with those of the bloc. “Georgia has the ambition to transform itself into a modern European state,” says Ms Bjorlin Hansen. “The EU Association Agreement is the biggest driver for all legal reforms and is having an impact on the business environment too.”

Robust, yet incomplete

Despite being a small and highly open economy, Fitch Ratings associate director Kit Yeung says that “the government and central bank’s strong macroeconomic policies and discipline have helped make it quite resilient to regional shocks”. Notwithstanding years of economic crises involving big neighbours, like Turkey and Russia, the government’s long-term issuer rating by Fitch has risen two notches since the 2008 global financial crisis and remained at BB throughout the pandemic. 

The country averaged 5% economic growth between 2005 and 2019, and though it contracted 6% in 2020, Fitch credits the government and central bank for containing what it expected to be a bigger hit. “The recession has been slightly milder, and the government’s finances marginally better than we expected,” says Ms Yeung, who leads the rating agency’s Georgia coverage.

Fitch forecasts growth of 4.3% this year and 5.8% in 2022 — a faster recovery than other BB countries. But Paul Gamble, its head of emerging Europe sovereign ratings, warns no amount of good policy-making can eliminate Georgia’s economic risks from abroad. “This is a small open economy and is vulnerable to shocks. It has important, but complicated, relations with Russia, and is heavily exposed to Turkey via trade, investment and tourism. Its policy framework is good, but it is very heavily exposed to external events.”  

There are domestic shortcomings, too. While low utility costs and an average monthly salary of $390 makes for a cost-competitive operating environment, there is a persistent skills gap. The unemployment rate is consistently in double digits and more than half of those looking for work are under 34. “There is a general entrepreneurial spirit in the country and we hear from investors that the labour force’s basic knowledge is very good, although there is room for more specific knowledge to be developed,” says Ms Bjorlin Hansen. “Greater alignment between business needs and education opportunities would help in this regard.”

Attuned to this, the government has made education a key priority, with a particular focus on vocational training.

Nearly a third of Georgia’s population lives in its lively capital, Tbilisi, where investment and economic activity is concentrated, but the government is working to tackle regional disparities. With World Bank support, it is upgrading the national road network and rolling out high-speed internet to some 1000 villages in the mountainous regions. 

Growing potential

While interest among foreign investors is growing, it has not yet translated into significant inflows. Data from the National Statistics Office of Georgia shows that annual FDI volumes fluctuated between $1bn and $2bn in the nine years leading up to 2019. “Georgia is a new country for investors,” says Mr Pertaia. “We started promoting it as an FDI destination about 10 years ago and it takes time. Especially as we are fighting the post-Soviet stereotypes of high corruption and high bureaucracy.”

The biggest source market is Europe, led by the UK, Netherlands and Germany. The EBRD is another key supporter, having invested €4.1bn since the early 1990s. Investment from Asia is also on the rise. Last year, Georgia sealed its biggest Japanese deal to-date, when power utility Tepco bought a 31% stake in the 108MW Dariali hydropower plant. Chinese conglomerate Hualing Group has invested in various industries since 2007 and operates one of Georgia’s four free zones. “I think we can bring a lot of investors from China, and once the pandemic is over, we will definitely work with them more,” says Mr Pertaia. 

In 2019, China’s Changan announced it would open the south Caucasus’s first electric vehicle plant in Kutaisi; however, the project has since stalled. Another strategic project struggling to get off the ground is the country’s first deep-sea port in Anaklia, half way down its Black Sea coastline. The government’s contract with an international consortium to build the $2.5bn project was scrapped last year, following delays and, fDi understands, inability to find finance. A deep-sea port has been planned since 2014 and is critical for the country — particularly given its aspirations to become a logistics hub at the gateway between Europe and Asia. The government is reportedly looking for new investors. 

Notwithstanding these setbacks, foreigners looking to Georgia should be buoyed by the local investment scene. “The domestic investors I speak with have great faith in their country,” says Ms  Bjorlin Hansen. “The mood is quite upbeat and they are looking for new opportunities in multiple areas which is a very positive development.”

In association with Invest in Georgia. Writing and editing were carried out independently by fDi Intelligence.