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Fitch Ratings: Georgian Real GDP Growth to Reach 3% in 2013

Written by Madona Gasanova, The FINANCIAL

03/06/2013 07:00 (317 Day 09:25 minutes ago)


The FINANCIAL -- Change of government, new labour code and regional economic context are the main reasons for the slump in the Georgian economy during 2013, international and local experts say.


“We expect real GDP growth of around 3% in 2013, implying some acceleration during the rest of the year, with possible benefits from re-opening trade with Russia and growth in tourism,” Charles Seville, Fitch ratings ’ Director on Developing European Countries, exclusively told The FINANCIAL.

“The latest data we have for FDI is for Q4 of 2012, so we have not yet really seen what impact the change of government has had on FDI. However, large strategic investors, such as Azerbaijan’s state oil company, are still committed to the country,” said Seville.

“Preliminary indicators from Geostat show that GDP grew by an average of only 1.7% in Q1 2013, and that the pace of growth decelerated in January-March. Other indicators such as falling imports also confirm this trend. There are a number of reasons. Uncertainty following the change of government is playing a part, with changes proposed to the labour code for example causing investors to wait and see. Another is the regional economic context. Growth in Russia is slowing, so that remittances are growing more slowly (4%) than this time last year,” Seville, Fitch, told The FINANCIAL.

The slowdown seems to be mainly driven by demand-side factors, believes Givi Melkadze, Researcher at ISET and Senior Consultant at International Data and Ratings Department at Nastavia Limited.

“In particular, private investments are falling, putting downward pressure on growth. This is potentially due to the post-election uncertainties, both political and economic, that private investors and businesses perceive to be prevailing in the country. Likewise, budget consolidation measures being undertaken by the new government are reducing aggregate demand and thus, economic activity at least in the short run,” Melkadze said.

However Melkadze thinks that there is no particular reason for significant worries so far, since private investors just need some more time to be convinced that the new government is going to stick to its western-style development strategy with the Government’s role being limited only to maintain an attractive environment for private businesses.

“On top of that the month of April was already promising with year-on-year real growth estimates being around 4.1%, far above the similar estimate in March (0.4%),” said Melkadze.

For 2013 the Georgian Government started making optimistic prognoses. They stated that the economic growth parameter for 2013 would reach 6%. However, within a short time of this statement being made domestic and foreign organizations objected to this figure, deeming it unrealistic.

“The total statistical data of Georgia assures us that by the end of 2013 we will reach economic growth of a 6% indicator. The slump of FDI as well as domestic factors - inactivity of local business which remains in a waiting process and has uncertainty surrounding its goals - are reasons for our statement,” said Giorgi Kadagidze, President of National Bank of Georgia (NBG).

Within three days of Kadagidze’s statement EBRD reduced its economic growth rate of Georgia from the previously predicted 5% to 3%.

Fitch hasn’t changed its rating of Georgia since the elections. Previously, Fitch upgraded the rating from B+ to BB- in December 2011, with a Stable Outlook, and affirmed it in December 2012.

In 2011 we read that despite its solid macroeconomic performance and the turnaround in its public finances in 2009-2011, Georgia remains a relatively low-income, highly dollarized country with a wide current account deficit (CAD), institutional weaknesses and political risk. A favourable business and investment climate is an offsetting asset.

“Political risk weighs on the ratings. Georgia is located in a geopolitically unstable part of the world and the regions of Abkhazia and South Ossetia are a potential flashpoint between Russia and Georgia. A resumption of hostilities is a low risk, but would have negative rating implications,” Fitch stated in 2011.

“Georgia’s institutions will be tested as it holds the third round of elections since the Rose Revolution in 2003, with the current President Mikheil Saakashvili due to step down after two terms in office. An increase in domestic political risk could be a driver of negative rating action, not least because it might interrupt capital flows - which include donor funds and multilateral lending,” the report stated.

“Georgia made a good recovery from the global financial crisis and has reduced its fiscal deficit. However, one of our main concerns about Georgia, which predates the election, is its external finances. Georgia runs a wide trade deficit and a current account deficit of 10% of GDP, so it needs to keep attracting external financing, making it vulnerable to any interruption in inward capital flows. So far, reserves are very stable, suggesting it is continuing to do this, but at the cost of growing external debt,” said Seville.

Economic Policy Research Center (EPRC) stated that this indicator of economic growth from the predicted 6% down to 1.7% is rather low and raises questions about the performance of the 2013 budget parameters and the collection of budget revenues. To support or dismiss such doubts it is of great importance to look into the performance of the state budget for the first quarter in that part which concerns the revenues to be collected in the form of nationwide taxes established by the law.

The 2013 state budget set the target of tax revenues at GEL 6,920,021.8 thousand whereas collected tax revenues made up GEL 1,553,501.7 thousand, which comprises 22% of the planned annual indicator.

The rate of economic growth in the first quarter of 2013 indicates negative tendencies in the economy. To avoid further aggravation of those problems, it is necessary to take several important steps.

The Government should draw up a plan for the development of the country’s economy. This plan should contain information about the short and long-term economic policy the Government intends to implement as well as concrete measures for the implementation of those policies to help improve the economy. Such a document must be discussed extensively with the business community in order to have the private sector develop the feeling of stability which will encourage them to take long-term economic decisions.

In previous years the state was a financier of quite a few economic projects. Such an attitude could probably be conditioned by a number of economic or geopolitical factors. Consequently, the influence of the state budget on economic activity was quite strong. Taking into account that the 2013 state budget is more oriented towards social assistance projects, the spending on economic projects has been slashed and consequently, the influence of the state budget on stimulating the economic growth has weakened. Thus, until after the business sector has developed a long-term vision and the political situation in the country has become more stable, the state should seek additional funds for financing economic projects and thereby, stimulate economic activity.

As of 1 April, 2013, cash balance on the accounts of the state budget exceeded GEL 900 million. Considering this, it is necessary for the budget organisations to expend allocations from the budget in order to ensure the return of amounts received in the form of tax and other revenues into the economy and the stimulation of economic activities.



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