The FINANCIAL -- Foreign direct investment (FDI) in Georgia amounted to USD 865 million
in 2012, 23 percent less than the adjusted data for 2011 and up 6
percent from the adjusted data for 2010.
Preliminary data of the fourth quarter of 2012 has been provided by the National Statistics Office of Georgia. Political uncertainty is the main reason for the slump in FDI, experts tell The FINANCIAL.
“Deceleration started with the active pre-election campaign of parties in late spring 2012. The reason for that is obvious. A developing country with increased uncertainty cannot guarantee much in terms of property rights and competition. The flow of FDI continued to decrease and finally in Q4 it had reduced by 38% compared to Q4 in 2011. This dramatic reduction in the post-election period means that foreign investors do see the risks and the environment is not stable yet,” Maya Grigolia, Research Fellow at ISET Policy Institute, told The FINANCIAL.
According to Grigolia, FDI has increased significantly over the last decade and become an important force behind the economic growth of Georgia. “The empirical evidence in developing countries shows that foreign investors regard economic and political instability to be a major barrier. Other possible barriers which can decelerate the volume of FDI in Georgia are high credit costs, frequent changes in rules and regulations, lack of protection of intellectual property rights and competition, and high levels of uncertainty,” she said.
“Investment decisions are based on two factors - what the expected return on investment is, and what the risk will be. The expected return depends on the market size, accordingly some industries cannot be considered at all. Risk factors depend on political situations and on such economic processes as stability of inflation, dynamics of credit interest rates and exchange rates. Georgian economic factors are not characterized by fluctuation. Consequently, investors are more interested in the political situation,” said Temur Kuprava, Professor at Free University.
“The current reduction of FDI is due to political uncertainties. Such caution will likely be maintained till October,” Kuprava predicts.
FDI in 2012 decreased by USD 252 million in Georgia. The entire year was not characterized with a negative FDI trend however; in the first quarter FDI increased by about 28% compared to the same period of 2011.
“Georgia should not expect an increase in FDI until the clear formation of industrial and general economic policy, including competition laws, which should provide the right micro and macro conditions for larger FDI,” said Grigolia.
The total number of foreign direct investor countries amounted to 66 in 2012. The same indicator in 2011 was 65, and in 2010 - 62 countries.
The main investor countries in 2012 included Germany with USD 141.7 million, the Netherlands with USD 87.5 million, Turkey - USD 87.1 million, Azerbaijan - USD 72.7 million, and the UK - USD 66.8 million.
“The Netherlands prodigiously increased their investments in Georgia in 2007, when business confidence and optimism was at a peak. The following war and financial crises however meant that inflows from the Netherlands decreased. Investors started to believe in the Georgian economy again when the economy started to recover in 2010 but again reduced with the uncertainty created by the parliamentary elections in 2012,” Grigolia explained.
“The same trend is observed for Azerbaijan. The Netherlands and Azerbaijan are the top investor countries in Georgia and their confidence and decisions have a significant impact on the Georgian economy. The Netherlands was responsible for 14% of the 22% total decrease in FDI in 2012 (Azerbaijan was responsible for 5% and other countries - for 3%),” she added.
Kuprava, Freeuni, said that categorizing foreign investments by country is optional. “Investments are issued by individuals, not whole countries. A company interested in investing in Georgia can be registered in one country, while its capital may emerge from another country. Accordingly, investigating which country’s capital is presented is difficult and unnecessary.”
Manufacturing, energy, financial, and transport and communication sectors are the most heavily invested sectors by foreign investors (their share in FDI are 22%, 20%, 18%, and 17% respectively). It should be mentioned that in the fourth quarter of 2012 FDI in these sectors had decreased as well.
Besides the fact that one of the highest shares of FDI comes from the financial sector, the market is still very small and has huge potential for development. We should expect increased investments in this sector in the future. The same can be said for the manufacturing sector. The sector is undeveloped and therefore there is no competition. Small competition leads to higher profit, thus increased investments are expected in this sector as well because high profit will attract investors. This hypothesis can be expanded for all other sectors where competition is low and business stands to gain more,” said Grigolia, ISET.
“The list of attractive industries for investors is one of the most important issues which I think the current government is working on in order to deliver signals to private investors,” Kuprava estimated.
“The Georgian market is limited when it comes to improving the investment climate. It is not a great choice. Therefore, in most cases, the decision of investors to enter the Georgian market can be explained by the possibility of transit to neighbouring countries. This complicates investment decisions though as it requires the study of regional markets and taking all the current economic and political factors into consideration,” Kuprava told The FINANCIAL.
On January 23, during his visit to Davos, Georgian PM Bidzina Ivanishvili said that his goal is to attract foreign investors’ interest towards Georgia. “I assure you that investments in Georgia will grow and real economic prosperity will start… You will see what the real economic rebuilding is on the third year of our presence in government,” he said.
Morgan Stanley , the world’s one of the leading financial institutions predicted that in 2013 the scheduled state revenues will not be collected and the deficit will reach 3, 5% instead of 2, 8.