The FINANCIAL — Billionaire Bidzina Ivanishvili, who held the position of PM since the victory of the Georgia Dream coalition in 2012, has left office. Ivanishvili said he wants to turn Georgia into a “perfect European democracy” but it is unclear whether this is compatible with his position behind the scenes, as the UK-based Guardian commented.
A souring of the domestic political climate, increasing unemployment, reducing employees’ wages and increasing oil prices is what some opposition leaders and experts predict for Georgia.
“The Georgian economy has shrunk threefold. The budget deficit has reached 1 billion. Next year the Government is due to get a loan of over 1.1 billion that will have to be covered by the next generations,” said Zurab Japaridze, MP from the United National Movement party.
“The probability of increasing unemployment as well as reduction of employee’s incomes is high. Deterioration has occurred in a number of economic indicators in 2013. Next year’s budget (the current version, which is not final) does not allow for a positive prognosis in this regard,” Japaridze told The FINANCIAL.
The United National Movement lost the parliamentary elections to Ivanishvili’s Georgian Dream coalition in October 2012, with the oligarch promising to lavish some of his multibillion-pound fortune on the country.
“The completion of the electoral cycle has demonstrated that Georgia’s institutions can channel political change. However, the political scene is still relatively fragmented and the current coalition’s cohesion will be tested following the resignation of Mr Ivanishvili from the post of Prime Minister. Judicial proceedings against members of the previous administration could sour the political climate,” Fitch Ratings recent outlook reports.
“GDP growth fell to 1.7% in 9M13, due to the steep reduction in public investment as the Government was reviewing some of its public contracts. Electoral and policy uncertainty was also a hindrance to investment and weak domestic demand acted as a drag on GDP growth and further dampened inflation. However, a pick-up in public and private investment is expected in 2014. It will support an acceleration of GDP growth to 5%, closer to the average for 2010-12,” the report states.
According to Fitch’s report, the new government has significantly improved bilateral relations with Russia and allowed for the opening of the Russian market after a ban was imposed in 2006. As a result, exports to Russia increased from 2Q13. Fitch expects exports to Russia to continue to grow in 2014-15.
“The improved bilateral relationship with Russia is likely to boost Georgian exports to the Russian market. However, despite its positive impact on the Georgian economy, the rapprochement with Russia could be double-edged. Indeed, although Georgia’s main exporters have diversified their markets in recent years, a risk remains that they become overly-reliant on lucrative Russian markets again, which could expose them to sometimes unpredictable developments in Russia’s foreign-trade policy,” Vincent Forest, Associate Director at Fitch Ratings, told The FINANCIAL.
“Besides the opening of the Russia market, restoring relations with Russia will help Georgia attract more inward FDI from Russia, but also from third party investors as the move will further assuage fears of political instability in the region,” said Forest.
In his words, political and policy uncertainty was a key driver behind the slowdown in FDI witnessed in the current government’s first year in power. “Russian FDI followed the same trend and is expected to pick up in the coming months”.
Japaridze, UNM, underlined the two main steps that the Government should take to improve the economic situation.
“We should go the deregulation way or, in an extreme case scenario, declare a moratorium on legislative initiatives affecting the economic environment. It is important to ensure the feeling of the private sector that the economic environment is improving, or, at least, is stable and not deteriorating,” he said.
“Lowering taxes and reducing government spending. The state has always been an ineffective spender. That is why it is important to leave the major share to the private sector and thus to stimulate private initiatives. This will be an important stimulus to the economy,” said Japaridze.
The heads of the Union of Oil Importers, as well as Association of Oil Products Importers and Distributors, do not think that oil prices will show significant change during the next month. However, from winter the prices are predicted to increase.
“The current price dynamics on oil products will be maintained till the end of 2013. It is possible it might shake a little, but the general picture will remain the same. During wintertime demand for fuel increases will be reflected in our country. This will possibly cause price growth in 2014. After the winter season the prices will grow and a declining trend will become more stable,” said Giorgi Kotrikadze, head of the Association of Oil Products Importers and Distributors (NIA).
The current instability in the Middle East and the world economy will presumably be a reason for the oil price growth, according to Vano Mtvralashvili, head of the Union of Oil Importers.
“World economy, which firstly determines the demand for oil, is the main factor determining international price. Geopolitical issues, mainly in the Middle East and other oil producing countries, are another factor affecting oil prices. The recent instability in both directions is the reason for the currently high prices of oil. Due to high demand for oil products and continuing instability in the Middle East oil prices are expected to remain at a high level in 2014. Georgia as an oil importing country is directly dependent on international prices. Accordingly it is most likely that high prices will be sustained here,” said Mtvralashvili.
There are over 10 oil (petrol, diesel) import companies operating in Georgia. Their number was 2-3 less in 2011.
596.7 thousand tonnes of petrol and diesel were imported in Georgia during the first 9 months of 2013. Out of that 263.6 thousand tonnes was the share of petrol and 333.1 thousand tonnes – diesel.
265.5 thousand tonnes of petrol and 337.8 thousand tonnes of diesel were imported in Georgia in the same period of 2012. Total oil import amounted to 842.3 thousand tonnes in 2012.
Mtvralashvili, together with Kotrikatdze, said that oil dealers operating in Georgia will continue operating in the competitive environment.
“The oil sector is the largest taxpayer in the country. It is the biggest investor and major employer. In recent years companies have made major infrastructure upgrades, with significant investments. Accordingly, the next year will be a priority for companies in this direction. Oil dealers have started expanding their networks with alternative fuel sources – for example Auto Gas, which will actively continue. Supporting social projects, which are constantly being carried out by the companies, will also remain important to them,” said Mtvralashvili.
“There is a competitive environment in the market. Every company is trying to improve their service so as to attract more customers. Oil dealers are opening up new fuel stations and this trend will continue next year. The market will become more competitive, the number of fuel stations will increase. Many innovative steps are expected from the oil companies in 2014,” Kvirikadze told The FINANCIAL.
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