The FINANCIAL — The world financial crisis is not yet over, largely affecting foreign and local investments in Georgia, CEOs of key companies interviewed by The FINANCIAL believe. There are still some obstacles to overcome while investing, such as problems with lending and political risks. However, as the CEOs declare, the procedures and government regulations are quite supportive and in Georgia it is quite easy to do business.
In interviews with The FINANCIAL key company CEOs shared their experience and overview of Georgia’s investment climate, the obstacles and barriers local as well as foreign companies face in Georgia.
“The financial crisis is not over. The USA, Europe and Japan still have significant economic problems; not least low growth, excessive government debt and high unemployment. This means that FDI to Georgia from these regions is still far too low,” declared David Lee, General Director of MagtiCom and AmCham.
“ICC’s assessment is based on an extensive analysis of businesses all over the world and our conclusion is that the financial crisis is far from being over; having said that we believe that the investment climate in Georgia is one of the best in the world; legislation is very investor friendly and most importantly the Georgian Government is genuinely committed to facilitating the life of both investors and local businesses,” said Fady Asly, Chairman of ICC.
“The main problem is that emerging markets are losing their competitive advantage over mature markets where there are many good opportunities nowadays; so until those opportunities decrease most emerging markets will be struggling to attract investments,” added Asly.
“The investment climate and situation is not enviable in any country of the world at the moment and Georgia is no exception. The problem here is not a lack of projects or sectors to be invested in but the attitude of investors derived from the vagueness of the crisis,” said George Chirakadze, President and CEO of UGT.
“The financial crisis which is not over yet quite heavily affected Georgia as did the war in 2008. However there is more activity from the investment side now, and the general mood and environment is better in the second half of 2010 compared to the first quarter. This fact is proved by the privatization of units by the Ministry of Economics and Sustainable Development. Moreover, there was some competition over several units which was quite surprising for me,” added Chirakadze.
“There is investment potential in the country, despite the fact that we have passed through quite a difficult period. Which is not just a problem of Georgia but a case that liquidity of cash and capital is quite low in the whole world,” added Chirakadze.
“The investment climate in Georgia is better than it was before the crisis, and there is more support, however this is not enough to evaluate Georgia’s investment climate as good,” said Itsik Moshe, President of the Israel-Georgia Chamber of Business.
“I should remark that from Israel only there is 10 billion USD in Eastern Europe and till 2012 year there are no signs of activities to be continued. However, the first investments will be made in Georgia after the Jewish investors start massive return in Eastern Europe,” added Moshe.
“The financial crisis is largely over but there are still down-side risks especially for countries such as Ireland and Greece with large budget deficits,” declared Andrew Coxshall, Managing Partner of KPMG.
“As a small, open economy Georgia could also be impacted from the fallout from the rest of the world. However the investment climate in Georgia is good with lower levels of corruption than other countries in the region and relatively low tax rates and little state interference. Also it is a lot easier to do business in Georgia with the Government providing assistance to foreign investors in various areas,” declared Andrew Coxshall, Managing Partner of KPMG.
“The financial crisis didn’t touch Georgia directly, as the Georgian banks were not operating on risky products and markets. So the financial crisis had indirect impact as foreign investors or potential foreign investors had to recover before thinking again about operating abroad. However, on the other hand, as western central banks gave huge amounts of money to their commercial banks, with low interest rates, the banks had means even more than before the crisis. Now, and it’s a real paradox, the question for most of the western banks today is to find good investments and not to find money for that,” declared Nelson Petrosyan, Director and Partner of Grant Thornton.
As Ted Jonas, Managing Partner at the DLA Piper Tbilisi Office, declares, the financial crisis may be over, but its effects continue to be felt everywhere in the world in high unemployment, reduced spending and investment, and other depressed indicators.
“The investment climate in Georgia is excellent, in the sense that the Government is continuing to do all it can at the macro level to create a business friendly environment. The positive efforts of state policy are creating at least a hope that Georgia can pull out of the recession quicker and more fully than it would without such efforts,” declared Jonas.
“However, at the moment, private-sector-origin investment, both domestic and foreign, remains very sluggish. The major economic activity that we see right now is catalyzed by public, state-owned international financial institutions — IFC, EBRD, OPIC, Black Sea Trade and Development Bank and Asian Development Bank. These are not private sector investment banks: they loan and invest the taxpayer money of their member states. They have done a lot to keep the Georgian economy moving over the past couple of years. Fortunately, the indicators have recently been so good that private sector origin investment is beginning to pick up again. The current trend is good,” added Jonas.
“Though the most acute phase of the global financial crisis has passed, recovery remains fragile. Persistent risks to economic health include high unemployment and low growth in developed countries and scarce international financing for developing countries,” said Farhod Tashtemirov, General Manager of Citadines.
As Atakan Turhan, General Manager of Radisson BLU Iveria Hotel, says, he has the opportunity to observe the investment traffic in Georgia, as the international business hotel hosts quite a large number of foreign businessmen.
“What we have observed is that the traffic is increasing. Most of the businessmen still consider Georgia an emerging market with lots of opportunities. We are seeing interest in energy, transportation, food production, electronics, construction, chemicals & retail sectors especially,” declared Turhan.
Where to invest?
CEOs distinguished tourism, real estate, and agriculture sectors as having the biggest potential for investment and consequently high ROI.
“The sector that offers the most potential right now is probably tourism and real estate in and around Batumi and investments based on the Poti Free Industrial Zone. In the longer term I believe that agriculture is massively under-invested. Greater investment in agriculture would have a geared effect on the economy as it is the largest employer, it would reduce hard currency food imports and increase exports and the excellent Georgia lands, climate and irrigation are a natural resource that has to be better utilized. I also expect that the USAID Economic Prosperity Initiative has sufficient scale to materially improve the situation over the next 2 to 5 years,” declared Lee.
Coxshall, KPMG, believes that the natural resources sector (goal, copper, etc) is attractive due to the very high commodity prices and the agricultural sector due to the under-developed nature of this sector in Georgia.
Tashtemirov declares that many sectors of the national economy can be named for the highest investment opportunities like hydro power generation and water, agriculture, tourism, mining, transport, real estate, food and wine sectors.
Chirakadze believes that in the long term the energy sector has the highest potential. There has been much investment in the sectors since 2006. “Energy has huge potential from the direction of export and investment in this sector will continue in 2011 and in 2012,” added Chirakadze.
“High potential is seen by investing in the financial-banking sector,” added Chirakadze.
Vakhtang Butskhrikidze, General Director of TBC Bank, believes there is high potential in investing in telecommunication, infrastructure, tourism and agriculture sectors.
The majority of problems foreign as well as Georgian companies might face are still the high risks in the region, political as well as economical, according to CEOs.
“Local and foreign businesses still lack confidence in the legal and tax regimes in Georgia, however I accept that the Government is actively addressing these issues. Once again, USAID projects concerning law and order and democracy will help speed up the necessary improvements,” said Lee.
“There is still division between what the Government is promoting (ease of doing business, transparency etc) and the reality on the ground – especially as far as the tax authorities are concerned who take a heavy-handed approach to tax investigations. Also there is widespread distrust of the court system although our experience has been positive,” declared Coxshall, KPMG.
“At present problems are divided into 3 parts, one is the frozen amounts of money in Eastern Europe, the second is caution regarding the Georgian banking system, and the third is a need for coordinated work to overcome negative PR. Many Israeli investors have the information and belief that Russia can invade and conquer Tbilisi in an hour, which puts an end to their investments. It is not difficult to understand where this comes from. To solve the problem we need coordinated work and I am ready to contribute my share in the committee,” declared Moshe.
“We are all aware that credits in Georgia are not easily accessible which is regional specific. This prevents further investments and additional capital increase from local capital markets, banks and financial institutions. The decrease in risks would support increase in business activities and would give the opportunity for locals as well as for Georgians to invest more and raise money from local markets,” said Chirakadze.
“In terms of political risk, there is the Russia factor. Despite the fact that there is current stability with Russia there is still the bomb principal – that just a few hundred kilometres away there are Russian soldiers stationed. However, what is happening in tourism is quite a positive indicator. That despite the region being politically troubled many tourists still arrive in the country,” added Chirakadze.
“Everybody has less money to invest, and a higher risk aversion to invest what they have, than before the financial crisis,” said Mr. Jonas from DLA Piper Tbilisi.
“What affects Georgia specifically is an ambiguous image: many negative events from November 2007 until recently that have made it appear unstable — war, political upheaval, some unwise public statements and actions. The Government is working hard now to counter-act that image of instability and there is objective evidence that they are succeeding in creating a new, more stable reality,” added Jonas.
“What I see is that stability and security is more an issue to those who have never been to Georgia before. The more times they visit Georgia, the more comfortable they feel. I have also observed that the negotiation process sometimes takes a long time,” declared Turhan.