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Business Activities in Decline since Parliamentary Elections

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The FINANCIAL — Since the parliamentary elections, companies operating on the Georgian market have reduced their activities.

 

The FINANCIAL — Since the parliamentary elections, companies operating on the Georgian market have reduced their activities. The business sector has become comparatively passive in recent times, a fact that is confirmed by the latest statistics. An almost 20 percent decrease was observed in registering business in 2012 compared to 2011 according to the Public Registry Service. Experts say that the reason for the decrease in registering business is due to the unstable political situation.

Besides the elections and relatively unstable political situation, another reason for companies’ relative inactivity is that the current government intends to revise all of the projects that were started under the previous government, experts say.

“Declines in foreign investments, export and import have been statistically confirmed, and are supposedly the result of a cautious attitude in response to the recent political changes,” said Paata Sheshelidze, economic expert and President at New Economic School – Georgia. “It seems to be largely a decline of the activities of those companies who were involved in various projects of the previous government. Governmental interference in business is changing due to the new government – a number of fields are now financially dependent on government funds or budgets. The way out is economic liberty, tax cuts and reduction of state costs. It is important that the Georgian Lari is guaranteed by gold, which will eliminate inflation,” he added.

“The United National Movement government’s narrative was that Georgia was modern and forward-thinking, cheaper to operate in than Europe and less corrupt than Bulgaria/Romania,” a foreighn investor in Georgia, who wants to remain anonymous, told The FINANCIAL.

“The winning party declared that Georgia was a corrupt police state and that businesses here were living in fear. During the lead-up to the elections, foreign financiers and investors stopped providing funds for Georgian commercial activity. The winning party informed foreign press that the UNM was raising private armies for a civil war in Samegrelo, and that turned a lot of investors off. After the elections, business has been stagnant in some sectors. Anything related to large scale infrastructure or construction is at a complete standstill,” he said.

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“Investment activities dependent on foreign investment have mostly halted, apart from those businesses backed by Russian investors. In our case, investors who had signed our term sheets for substantial labour-intensive investment projects have backed out of investment deals, citing unacceptably high sovereign risk and political uncertainty. These investors are from the Netherlands, China and Japan. In the case of our operations, USD 20 million worth of investment for 2013 has been cancelled, which would have employed over 300 people in development and 150 people permanently,” he added.

“Service companies that provide support to large infrastructure and construction projects are hit very hard, as many hydro projects have been suspended by the new government. One friend who owns such a company has had to sack half his staff this week; his firm is well established and has been operating successfully for a decade. Another friend in the same situation is considering closing his business, dismissing his twenty local staff and relocating to the EU. A third friend  in the same sector sees no further potential for growth in his Georgian business and is investing in Kazakhstan to secure the future of his company,” he said.

“Another problem is that binding contracts signed with the previous government are not being honoured by the new government; the phrase “review of previous contracts” is used to delay payment for an unacceptable period, causing distress to companies owed large sums of money. Bad debts left by the previous government are not being settled by the new government either, despite promises to do so,” he said.

“There is a macro-economic risk that the government honouring its huge public spending promises will drain the budget, and additional taxes will be levied on business to pay for it, which will be very negative. The old concept of needing an intermediary to meet with ministers seems to be making a comeback, which in such a small country is unnecessary. It damages efficiency and is a recipe for corruption. If the Government can tackle high-level corruption, collusion and nepotism as promised, while maintaining a light regulatory touch, and a low-tax environment, then strong capital inflows into the private sector should restart,” he said.

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Fifteen out of twenty companies asked to comment about the dynamics of business activities since the parliamentary election, preferred to keep silent.

“We would prefer that any comments that we make focus purely on our project and/or the retail market. Therefore we prefer not to comment on this issue,” said Tim Wilkinson, Managing Partner at Redstone Asset Management.

“I do not have reliable information about declining companies’ activities in Georgia,” said Mamuka Shurgaia, CFO at SRG Investments LLC. “Accordingly, I cannot give you any examples regarding this issue and cannot confirm whether this information is correct or not. At our company such a thing has not happened,” he added.

“At Magticom we are seeing an increase in activity since the elections,” said David Lee, the President of Magticom and Chairman of the Eurasia Partnership Foundation. “I think that the political challenges will result in caution with regard to new long-term investments until the policies of the new government become clearer and co-habitation becomes less fraught.  However the recent progress in the Deep and Comprehensive Free Trade Agreement, the improving trade relations with Russia and the new agricultural development plans are big ticket items that should quickly improve confidence in many sectors,” he added.

“We are making huge gains in our Satellite TV business and demand for internet continues to grow strongly, particularly in the regions. As the agricultural investments this year “take root” there should be real growth in the regions. I see more upside than downside right now, problems are being addressed. Businesses need to plan and feel confident of the future and the new government is doing a lot to make this happen,” Lee added.

 

 

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