Monica Ellena -
Currency devaluation, low competitiveness, and a drop in remittances because of Russia’s downturn have put pressure on Georgia’s economy, but Nodar Khaduri, finance minister of the South Caucasus nation of 4mn, believes that strengthened relations with Europe will provide support for the economy in the medium and long term.
“These are difficult times, there are plenty of challenges requiring strong responses,” Khaduri tells bne IntelliNews in an exclusive interview, but after only one year since Georgia signed the Association Agreement with the EU, free trade with a market of almost 1bn people has already brought “tangible” results.
“Today the EU accounts for over a third of the trade and exports and our dependence on the Russian market is gradually declining,” Khaduri tells bne IntelliNews. “The geography of our trade shows it is Europe we look at.”
Domestic political uncertainty is also weighing on confidence and growth. On May 8 the government survived a confidence vote in parliament, called after Prime Minister Irakli Garibashvili was forced to reshuffle his cabinet following the departure of seven ministers over the past year.
The European Bank for Reconstruction and Development (EBRD) expects Georgia’s growth to halve to 2.3% in 2015 from 4.7% in 2014, reflecting mainly a deteriorating external environment, with recession in Russia and a sharp slowdown of regional trading partners. The resulting lower exports and remittances have negatively affected growth and the external balance of payments.
In the first quarter Georgia’s foreign trade declined 10% year-on-year to $2.27bn, but exports to EU-member states rose by 21% y/y $170mn and accounted for 33.8% of the country’s total exports. Exports to the Commonwealth of Independent States on the other hand dived by 55% y/y to $175mn and accounted for 34.8% of the total.
The chronically negative trade balance – $1.6bn in the first quarter –“will require several years” to close, but the “access to the European market without barriers is a major achievement”, stresses Khaduri.
The devaluation of the lari has been the first casualty of the economic shocks Georgia suffered – damaging businesses and people with debt in foreign currency, thus increasing bad loans in an already highly-dollarised economy. The national currency has lost 18% of its value against the greenback since the start of the year, and 32% since last November.
The devaluation has sparked a blame game as some members of the government and the still influential former prime minister Bidzina Ivanishvili have accused the country’s monetary policy makers for failing to support the lari. The central bank intervened, albeit limitedly, in foreign exchange markets to reduce currency depreciations and hiked the key interest rate to 5% from 4.50% on May 6. The depreciation caused “indeed significant problems,” admits Khaduri, although the lari “is not the only currency suffering from depreciation in the region”.
A widened export base and a renewed privatisation process – proceeds were higher in the first quarter than in the whole of 2014 – are among the measures the government is working on to shore up the lari’s value.
Georgia’s access to Europe makes it “an interesting market also for countries like China to invest, and the government is pursuing a pro-active strategy to help entrepreneurship and the agricultural sector”, he says.
India is another heavyweight looking at Georgia, specifically at the country’s potential in hydropower. In March the International Finance Corporation brokered a $250mn debt financing agreement with the EBRD and the Asian Development Bank, paving the way for the largest-ever private hydropower investment in the country, in which India’s Tata Power joined forces with Norway’s Clean Energy Invest. In 2014 FDI increased by 35%y/y to $1.27bn, the biggest inflow since 2008 and a record Khaduri hopes will be repeated this year.
Georgia’s capital markets are “still rudimentary” and the Ministry of Finance “remains the main player [issuing] treasury bills”, he says. “The situation is not satisfactory but we had progress in the recent past,” he says, adding that in early May its ministry and the Ministry of Economy completed a draft strategy to develop capital markets which will be distributed among stakeholders for inputs.
Georgia’s two leading commercial banks – Bank of Georgia and TBC Bank – are listed on the London Stock Exchange and in 2014 the EBRD issued the first lari-denominated bond and this year other IFIs – the ADB and the IFC – followed in the EBRD’s footsteps.
On paper Georgia ticks all the boxes as a fertile ground for investors - a liberal and easy manageable tax regime, a competitive cost of labour and energy, a stable financial sector and an investment-friendly environment, as it ranks 15th globally in the World Bank’s Doing Business survey. But it is not enough.
“Sadly competitiveness of our economy is very low, due to low development of
[our] human resources, limited access to finance, and low level of enterprise competitiveness,” points out the minister, who is also deputy chairman of the EBRD Management Board.
For the minister, expanding vocational education to fill the gap between skills and employers’ needs, and facilitating access to finance are key, with the latter including the development of a savings-based pension system.
Georgia’s geographical position remains its most valuable asset to bank on as “it stands at the crossroads between Asia and Europe” and “on the background of what is happening in the world [it] has acquired higher importance”.
Pushing for new projects to facilitate its role as a hub remains high on the agenda. “We have already welcomed the first pilot train for the Baku-Tbilisi-Kars railway link, [as well as] the first train from China, and we have shortlisted the companies which will build the deep-sea port on the Black Sea in Anaklia,” the minister says.
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