Clare Nuttall in Almaty -

While other governments are struggling to raise funds from international donors to help them through the international economic crisis, Georgia is already stocked up with post-war reconstruction funds. This large and early injection of liquidity has put the country's economy in a strong position to actually grow this year.

Just six months ago, Georgia was defeated by the superior strength of the Russian army, parts of the country were still occupied by Russian forces and key infrastructure lay in ruins. Fears of further conflict and political instability were expected to cause an exodus of investment and the decline of the Georgian economy. Although GDP growth declined in 2008 after several years of double-digit increases, investors have since returned and Georgia today has one of the most stable currencies and most resilient economies in the region. This year, growth of 2.5% is forecast.

While neighbouring Armenia spent the first months of 2009 desperately negotiating financial support packages from Russia, the International Monetary Fund (IMF) and the World Bank, Georgia started the year with a GEL2.2bn (€1bn) fiscal stimulus package in place and financially supported by the US, the EU and other international donors.

Soon after the war with Russia, at an international donor conference in October 2008, commitments totalling $4.5bn were made to Georgia to help with the country's reconstruction. The IMF agreed to provide a $750m standby arrangement facility in September. "The IMF's $750m standby facility for Georgia - of which $250m has already been drawn down - was larger than those it has provided to other countries and was received earlier. This contributed to the stability of the lari, which is stabler than, for example, the [Armenian] dram, the hyrvna or the ruble," says Nicholas Enukidze, vice chairman of the Bank of Georgia's supervisory board. "This stability is thanks to the money pledged by international donors, which has helped to maintain the national bank's reserves, the IMF's support for the bank, and to the very decisive and efficient management of the national bank."

Of the money promised by international donors, around $1.3bn is already in use or has been allocated to specific projects. A large chunk of funds were allocated to social assistance projects for internally displaced people, which in total will receive $350m. Villages have already been built to house around 20,000 people. Transport infrastructure will receive $682m, energy infrastructure $381m, urban and municipal infrastructure $210m, and the finance and banking sector $1.105bn.

Major new deals are due to be signed in the near future. The tender processes for road construction projects are close to completion, and the companies to carry out other projects including the new high-voltage electricity transmission line to Turkey are due to be selected this year.

Georgia's banking sector has also received a substantial injection of funds, with the banks receiving financial assistance in line with their size and relative importance in the banking sector. Georgia's largest commercial bank, Bank of Georgia, has already received $240m, which has allowed it to meet all its 2008 obligations and pre-pay most of the payments due this year.

Political instability

Despite the stability of the economy, dissatisfaction with President Mikheil Saakashvili's regime has grown since the war, with many blaming him for leading Georgia into a conflict it couldn't possibly win. Complaints of an increasingly authoritarian rule have also grown. Around 2,500 people took to the streets on March 9 demanding Saakashvili's resignation, and there has been growing criticism from influential politicians - most notably ex-ally and former parliamentary speaker, Nino Burjandize.

However, investors and analysts commended the economic reforms, which have made Georgia extremely open to foreign investment. Reforms under Saakashvili include simplifying business regulation, the tax code and customs code, and tax reductions. On the World Bank's ease of doing business survey, they have catapulted Georgia from 112th place in 2005 to 15th in 2008.

In 2007, Georgia's net foreign direct investment as a percentage of GDP reached 19.8%, up from 13.9% the previous year - one of the highest ratios in the world and considerably ahead of other former Soviet bloc countries including Russia, Ukraine, Kazakhstan and Poland. In the uncertain times immediately after the conflict with Russia, foreign investments took a hit as nervous investors waited on the sidelines, but they have now come flooding back.

The Abu Dhabi-based Ras Al Khaimah Investment Authority (Rakia) recently confirmed plans to invest around $2bn in Georgia over the next five years. Zaza Mikadze, general director of RAK Georgia Holding, said the organisation has "a very optimistic view" on the Georgian market.

Rakia invested in Georgia's Black Sea port of Poti last year, also buying up 300 adjoining hectares of land where it plans to build a free economic zone. It will invest $200m to develop the port in the next three to four years, and up to $300m on the free economic zone. While this is its most ambitious project in Georgia, it is also investing in the renovation and refurbishment of the Sheraton Tbilisi, and has other development projects in the pipeline.

The banking sector has also remained attractive to foreign investors. Just two months after the war ended, Société Générale Group, which holds a 60% stake in Georgia's Bank Republic, announced plans to open 50 new branches by the end of 2009. "Société Générale did not enter Georgia to operate for five to 10 years. It's strategy is long lasting, and it is planning long-term activities and will become more and more active over time," a spokesperson for Société Générale in Georgia told bne. HSBC, which opened its first Georgian branch in June 2008, has also reaffirmed its commitment to the Georgian market.

"FDI in 2009 won't be as high as in previous years, when it was around 20% of GDP, about $2bn. However, we expect to see between $500m and $1bn in 2009," says Enukidze.

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