Georgia has continued to market itself to international investors in recent years, culminating in its hosting of the annual meeting of the European Bank for Reconstruction and Development (EBRD), which drew more than 2000 officials and delegates from over 60 countries to its capital Tbilisi in May.
Substantial EBRD investment amounting to €2.6bn over 22 years of co-operation has significantly boosted Georgia’s economic advancement, and the Caucasus country of 3 million people has been widely praised for its economic progress, transparency efforts and vastly improved business climate.
As Georgia pursues European integration following the signing of an association agreement with the EU, it is simultaneously feeling the burden of regional geopolitical turbulence as the Russia-Ukraine conflict, Russia’s recession and a fall in oil prices disrupts trade with its partners. The EBRD forum presented an opportunity for Georgia to spotlight its significant advancements in recent years and its ever-growing attractiveness as a business destination.
Following independence from the Soviet Union in 1991, Georgia’s economy underwent several years of turmoil amid high inflation and domestic unrest. Assistance from the IMF and World Bank helped turn the country's fortunes around by 2000, and thanks to widespread reforms, including market liberalisation, privatisation, anti-corruption efforts and dramatically simplified administration procedures, FDI into the country boomed and its economy grew at one of the fastest rates in the world. The years 2004 to 2007 saw economic growth of between 9% to 12%.
While these reforms helped mitigate the effect of external shocks, Georgia was still hard hit by Russia’s invasion of the country in 2008 – which saw the annexation of breakaway regions Abkhazia and South Ossetia – and the global financial crisis. The country did return to growth in 2010, however.
The Emerging Market Energy Security Growth Prosperity Index listed Georgia in the 10 top countries globally for the year 2013. Further strengthening investor confidence is an impressive list of rankings by international organisations – the Heritage Foundation ranks Georgia as the 22nd freest economy in the world, and the country moved from 130th place to 50th in Transparency International’s Corruption Perceptions Index. In 2014, Moody’s moved its outlook on the country from 'stable' to 'positive', and the World Bank’s Doing Business ranking places Georgia in 15th place globally. Inward FDI for 2014 was $1.2bn, against a total $10.9bn for the whole of the past decade, according to the EBRD.
Despite this, Georgia faces no shortage of challenges. “In this region things are quite turbulent and as a result the currency [the lari] has depreciated by more than 30%, which is very painful given that our dollarisation is high. People with loans in foreign currencies are facing a higher debt burden and disposable income has decreased,” says Giorgi Kadagidze, the governor of the National Bank of Georgia who was recently named as the Central Bank Governor of the Year for Europe by fDi's sister publication, The Banker. “Our biggest challenge is that productivity is very low among all sectors. In this regard, FDI is the single most crucial factor that influences our economy,” he adds.
“Our whole system and reforms are targeted at bringing more FDI into the country. So what we need right now, as a small, open economy, is to work really hard. We cannot afford to make mistakes.”
Certain sectors of the Georgian economy are planned to become critical drivers of growth, primarily energy. While the country imports all of its oil and gas, its geographical location provides enormous hydropower potential. In addition to replacing Russia with Azerbaijan as its primary source of gas imports, Georgia has invested in relying primarily on hydropower for its energy needs.
“Georgia is an attractive destination for investments in the energy sector, especially if we consider the vast hydroelectric potential of the country due to its unique natural conditions,” prime minister Irakli Garibashvili told EBRD meeting attendants at Georgia’s Investment Outlook Session. Hydropower has attracted $1.4bn in FDI to Georgia’s energy sector in the past decade.
Industry, real estate and agriculture are further major sectors for the Georgian economy, as is logistics, says Mr Kadagidze, “because we want to position Georgia as the logistical hub between Europe and Asia. Two of our immediate neighbours and five central Asian countries are landlocked, so we are offering a corridor towards trade to leverage that.”
Mr Garibashvili adds: “We believe that its geopolitical location should not be used as a transit corridor alone. Rather, the country has the resources to become a regional hub, offering a good environment for international companies to establish regional financial centres.”
Indeed, a key strength setting Georgia apart is its banking system. “We are moving towards being a regional financial centre. Our banks are 90% foreign owned, very well capitalised and we are witnessing more and more non-resident deposits,” says Mr Kadagidze. Two of Georgia’s largest banks, TBC Bank and Bank of Georgia, are listed on the London Stock Exchange.
Tourism is also on the rise, according to Tbilisi mayor Davit Narmania. Visitor numbers for the country hit 5 million in 2014, a figure he predicts will increase. “Georgians are famous for their unique hospitality, food and wine. We have a rich cultural heritage with many ancient natural sites, and the history and hospitality is something you have to experience in person. It cannot be replicated anywhere else.”
With the signing of the association agreement with the EU in 2014, Georgia became a party to a Deep and Comprehensive Free Trade Area, opening channels for investment and economic development in Europe. “The European market has opened its door to Georgian goods,” says Mr Garibashvili. “And if we take into account all the other countries with which Georgia has signed free-trade agreements, we have the opportunity to reach a market of 900 million.”
The deepening of ties with Europe is a top priority for Georgia’s government given the instability coming from Russia. Indeed for many, it is long overdue. “Georgians are historically Europeans; so we are not joining Europe,” says minister of economy George Kvirikashvili. “We are returning.”
But while these developments are promising, many Georgians remain disappointed in the pace of European integration. Plans for a visa liberalisation agreement with the EU have been delayed, and NATO has still not fulfilled its 2008 vow that Georgia would one day become a member. Recent polls reveal that one-third of Georgians support joining Russia’s Eurasian Union, Russian president Vladimir Putin’s geopolitical rival to the EU, an opinion that has doubled in its popularity over the past year.
Georgia’s partnership with the EBRD, therefore, remains a critical factor in the current political climate. “During our 25-year partnership, the EBRD has consistently shown support to Georgia in achieving our specific goals and overcoming difficulties,” says Mr Garibashvili. The bank has to date provided more than €2.6bn in financing for over 170 projects in Georgia, 83% of which are private.
While much of eastern Europe rides on a wave of geopolitical uncertainty, with neighbouring economies feeling the strain, Georgia remains a promising example of transparency and progress. “We need to pursue the second-generation reforms – the timing is not easy, but it is doable and we have proven that we have done that,” says Mr Kadagidze. “In terms of outlook, we have all the grounds to be optimistic.”