Real estate has been named the safest haven with a plausible return on investment for 2016 by the majority of Georgians questioned by The FINANCIAL. Opening a deposit is named the second most secure form of investment. According to experts, lack of entrepreneurship skills, financial literacy and stagnation of the capital market are the main reasons that limit investment opportunities for Georgians.
More than 300 Georgians were surveyed by The FINANCIAL during the last week. The main question was: where would they invest if they had between USD 100,000 – 200,000? We also tried to find out the household saving behaviour of Georgians and asked whether they manage to accumulate any savings.
The majority, or 65%, chose real estate. “Rental and lease rates are always good and less risky,” they believe. 30% would simply open a bank deposit. Receiving stable income without any effort has been the main motivator for those who prefer to place their free money in deposits. Only 5% of those surveyed were brave enough to start their own business, food spot or agricultural enterprise.
Georgians’ loyalty towards real estate has been accordingly described in the statistical data of real estate transactions in the country. According to the National Agency of Public Registry, the number of transactions in February 2016 has increased by 17.3% compared with the same period of the previous year. Transactions totalled 53,213 units.
The average price for two-storey apartments in Georgia range from around USD 50,000 and above. Monthly payments for rent range between USD 300-400. The return on investment is a bit lower when keeping savings in a deposit. The recent devaluation of the Georgian Lari contributed to a reduction in interest rates in foreign currencies. The average annual rate on USD amounts to 3% at commercial banks.
“Real estate and banking deposits are linked to low risk. This is the main contributor to their popularity among citizens,” explained Irina Guruli, Program Manager at Economic Policy Research Center (EPRC). “Low opportunities for investing are linked to stagnation of the capital market in Georgia. Many developing countries are facing such problems, while considering investing pension funds at less risky ways. Due to this problem the funds are distributed in treasury bonds or banking deposits,” Guruli added.
As Guruli explained, if a banking deposit is one of the less risky ways to invest, the return on investment is accordingly low. “More risk is associated with more profit,” she said.
Stagnation of the capital market is not the only reason that can explain Georgians’ behaviour towards investment opportunities. Maya Grigolia from ISET has distinguished a lack of entrepreneurship skills and financial literacy to explain the limited ways to invest in Georgia. “Resolving the problem is not possible in the short run. Transformation of the education system now will continue to give fruit for decades. Later we will reform the education system, with less probability of higher growth in the long run,” said Maya Grigolia, Senior Researcher at ISET Policy Institute.
“Determining a sector for investing in is linked to the volume of investments to some extent. If we consider by FDI we will see that Georgia manages to attract large but one-time investments. The country failed to attract medium-term, more-or-less stable investments. Sectors have also been characterized by variability. However, transport, communication, energy and construction remain the more attractive fields for foreigners in Georgia. During recent years investments have grown in the financial intermediation sector. As for return on investments, in recent data the average annual return in developing countries has amounted to 8.4%, and in emerging markets – 13%,” said Guruli.
According to the National Statistics Office of Georgia, foreign direct investments (FDI) in Georgia amounted to USD 1,351 million in 2015 (preliminary data), up 6% from the preliminary data of 2014 and down 23% from the adjusted data of the same year.
The share of FDI by major foreign direct investor countries is allocated as follows: Azerbaijan (40%), the United Kingdom (15%) and the Netherlands (8%).
The share of FDI by three major economic sectors reached 68% in 2015.The largest share of FDI was allocated in the transports and communications sector, totalling USD 594 million. The financial sector was the second with USD 191 million, followed by the construction sector with USD 129 million.
Despite constant economic problems and less optimistic expectations towards the future in Georgia, the number of citizens that try to save money is still low. Only 35% of those surveyed stated that they are saving money. 75% of respondents stated that they are keeping money in USD. The rest are choosing the national currency.
“There are several issues contributing to the nation’s spending behaviour, starting from the culture and religion, to the soviet past. But above that, I think that the main and most critical concern is the financial literacy of the Georgian population. Financial literacy, more generally, means the financial capability in terms of money management and financial planning. This type of knowledge can create faith in financial institutions and thus increase financial activity, lending support to economic growth and development,” said Grigolia, ISET.
As for Guruli, EPRC, low income is one of the reasons contributing to citizens’ behaviour to save money. “Another reason is trust in the future, past experience related to loss of savings.”
According to the World Bank report, Global Development Horizons, the least educated groups in a country have low or no savings, suggesting an inability to improve their earning capacity and, for the poorest, to escape a poverty trap.
“Policy makers in developing countries have a central role to play in boosting private saving through policies that raise human capital, especially for the poor,” stated Maurizio Bussolo, Lead Author of the report.
“Income has a positive effect on household saving. Richer countries therefore tend to have higher saving rates. Countries with high age dependency are associated with low saving rates, because working age population tends to save more than the old and the young. Weak government finances incline households to save more. However, this effect was not significant at the 10% level. Lastly, higher inflation was found to be linked with lower household saving rates,” say Stijn Rocher and Michael H. Stierle, in their paperwork, Household saving rates in the EU: Why do they differ so much?
The authors explained differences in household saving behaviour across EU countries by a large variety of determinants. “We discussed various determinants of household saving behaviour which are candidates to explain household saving rates differentials. We can group these determinants in six categories: (i) income and wealth; (ii) demography; (iii) economic uncertainty; (iv) fiscal policy; (v) financial market sophistication; and, (vi) the degree of international financial integration.”
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