Samantha Shields in Batumi, Georgia -

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Georgia has raised its growth forecast for this year after first-quarter indicators showed industrial production and exports returning to levels not seen since the country was hit first by the August 2008 war against Russia and then the world economic crisis, Finance Minister Kakha Baindurashvili tells bne in an interview.

Baindurashvili expects GDP to now grow by 4.5% in 2010, more than double the previous forecast of 2.0% made in September, and his ministry is in the process of revising up this year's foreign direct investment (FDI) target of $1bn, though he says it's too early to give an exact figure. In 2009, Georgia's economy shrank by 3.9% and FDI plunged by over 50% as the aftershocks from the war and the crisis took their toll.

"The driver has been production for export, and the speedy pick-up has happened because the high levels of investment we saw in 2007 have started working to create value and the world economy has picked up," Baindurashvili tells bne during a tour of new investment projects in the west of the country. "We are now getting close to the pre-war environment in terms of the macro framework."

Investor bait

Georgia will lure back foreign investors by emphasising the favourable tax regime, low corruption and free market environment that its government has tried to create since the 2003 Rose Revolution swept western-leaning President Mikheil Saakashvili to power, Baindurashvili says. "We're attractive because of our liberal economy. There were fundamental problems to investment here in 2003, but we tackled them," he says.

Georgia attracted $2bn in foreign investment in 2007 and that money accounted for 20% of GDP. Investments went into industrial and agricultural manufacturing, construction and tourism. The country exports foodstuffs, wine and mineral water, cement and steel products to the EU, neighbouring Azerbaijan and Armenia, as well as other CIS countries. Its biggest trading partner is the EU, which accounted for 26% of exports in 2009.

Baindurashvili points to Indian-Georgian joint ventures producing steel reinforcing bars in Tbilisi and the western city of Kutaisi as proof that manufacturing projects have come to fruition, and a cluster of almost completed five-star hotels and luxury apartment blocks in the government's showcase investment city of Batumi as illustration of resurgent real estate development and tourism. A Sheraton hotel will open in Batumi, a Black Sea port and resort, at the end of May, while a Hyatt and a Hilton are under construction. A new European-style boulevard now lines the seafront and the restoration of the old centre of the city is well underway.

The government also hopes the development of four Free Industrial Zones, where manufacturers will be able to produce goods for export tax free will attract a wide range of foreign investors. The first one, in Kutaisi, is already up and running, with Egyptian household goods manufacturer, Fresh, assembling gas cookers and water heaters for export to Armenia and Azerbaijan. Rakia Georgia, a subsidiary of United Arab Emirates-based Ras Al Khaimah Investment Authority, is building a second zone in Poti Sea Port, and will next year start to build a $300m port to serve it. Looking beyond that, the government is talking to potential investors in a third zone close to the border with Turkey and eventually hopes to build a fourth zone in eastern Georgia, Baindurashvili says. "Our theory with the free industrial zones is that both the investor and the government do well. They get a free tax environment, free trade and good logistics, and we get increased employment and dollar flows," he says.

Scaled back

The government is having to show some restraint in its privatization plans for this year because of uncertainty surrounding the worldwide recovery, and has put plans to privatize its railway system on hold. "Before the crisis we had intended to privatize the railways, but now we've put it on the shelf because we think the market is not ready for such a huge transaction," Baindurashvili says, adding that the government hasn't decided a new date for the sale.

Big privatizations this year will be Georgian Post, the country's postal network, and the healthcare sector, which should raise GEL200m (€88m), he says, adding that investors from Israel and the Czech Republic are already showing interest in hospital privatizations.

Georgia's banking system, which suffered no bankruptcies during the crisis because the country hadn't run up massive deficits prior to it, is showing signs of increasing private loans. "Three months ago, the banks had excessive liquidity, but that is now returning to more healthy levels," Baindurashvili says.