The FINANCIAL — “Georgia entered into official recession at the beginning of 2009. There were two aspects present simultaneously. The first was caused by the August war, lately intensified by the economic crisis. I believe that Georgia will start coming out of the recession by the third quarter of 2009 and that the economy will pick up by the end of the year,” Kakha Baindurashvili said in an exclusive interview with The FINANCIAL.
“Naturally there are some risks that the recession will worsen in September-October. Many countries have announced that they have managed to come out of the recession, though there are also many sceptically thinking experts who say that the economic crisis could soon be hitting with a second wave, which will bring those countries back into recession,” he said.
Despite gloomy predictions about unemployment rise in the banking sector in Georgia by experts the Ministry of Finance doesn’t expect such developments on the local market.
As Kakha Baindurashvili told The FINANCIAL’s reporter Levan Lomtadze, employees shouldn’t expect further hassle in the furlough frenzy.
“I don’t understand why banks would need to additionally lay off their employees. Their portfolios are already decreased and I think that there shouldn’t be any further changes in the credit portfolios. Thus I guess there are no plans of banks regarding further staff reductions,” he states.
Recently some of the countries have announced that they are out of the recession. Still others are saying that they are just now entering the final stage of the crisis.
In his interview with The FINANCIAL the Minister of Finance talks about the prospects of the Georgian economy in 2009 and the threats that could still worsen the investment climate.
Q. The Government’s forecast for the GDP growth has changed a couple of times since August 2008 and has finally been decreased by 3.5% than the previously stated level. Should we be expecting any sharper drop in GDP projections?
A. Forecasts on the growth of Georgia’s economy were relatively high when the budget was set at the end of 2008, in September. In the period when those projections were made there was no such world financial crisis as we have today. The collapse of the markets followed afterwards at the end of September. By that time it was very difficult to make precise estimations on GDP growth. But this was the case not only for Georgia, but all of the countries around the world.
This is not the first time we had to change forecasts on GDP growth. Already once, at the beginning of the year we presumed that the growth rate of the economy wouldn’t be higher than 1% in 2009. A 1% growth rate was agreed with the IMF, however at that time it would have been too early to make changes in the state budget. As for today we can officially say that the economy won’t expand and that it will actually contract by 1.5%.
The impact of the global economic crisis is evident. According to the latest figures provided by the World Bank the world’s economy will shrivel by 3%, which is a more pessimistic prediction than 1.3% made by IMF. However this distinction could be attributed to the time lap in which those two forecasts were made. The economy of the EU is shrinking by 4%, in CIS it’s 5.1% and 3.7% in Central and Eastern Europe. So we can clearly see that all of the markets with which the Georgian economy interacts are dwindling.
In addition to all of the above mentioned there was an erosion of trust of regular customers and investors and this has further aggravated the GDP growth rate forecasts. The businesses in Georgia have a sense of misapprehension in large due to the current inner political processes. This has resulted in the drive out of funds from active economy and decrease in overall consumption. Plus the foreign investors have become more reserved in their decisions.
We think that as soon as the setback in trust and apprehension of the future is dealt with there will be an activation of investments both in local and foreign investors. We expect growth to begin from the third-fourth quarters. We don’t anticipate the GDP rate to decline by more than 1.5%, though there is greater decrease in the economies of our neighbouring countries, except Azerbaijan.
Q. What are the forecasts for negative trade balance in 2009?
A. According to our findings negative trade balance will decrease. The decline in imports could be 30% compared to last year’s import figures. The imports will decrease in larger portion than exports as a result of which negative trade balance will be 16%, while in 2008 it was 22%.
Q. In order to survive through the economic crisis many small and medium enterprises regard financial amnesty as a possible ailment. Could those businesses be granted comprehensive financial amnesty gains?
A. We are not planning to have a financial amnesty in Georgia. This would mean hurting those businesses which have for years been honestly paying their taxes. We can’t help those SMEs which have been reluctant to pay taxes and are now hoping for financial amnesty.
The businesses that are well managed are even today, despite being in a harsh economic situation, paying their dues to the state budget, don’t need financial amnesty. The Government could start the restructuring of debts, which is more or less being done today.
Q. What are the statistics of the company bankruptcy rates this year?
A. Businesses do definitely have problems related to cash flows. This is the case for companies which are working on exports and those ones selling to the local market. However up to this date the condition has not reached the point where we could see companies massively going bankrupt. So the rate is not that high.
Q. In a statement released on May 19 ex-PM Zurab Nogaideli’s party, Movement for Fair Georgia warned that the state budget might face GEL 1 billion loss by the end of the year. He claimed that the estimation was made based on analysis of budgetary revenues in January-April. It said that in January budgetary revenues were 9% lower than in the same period of 2008; in February it was reduced by 14% from last February; in March – by10% and in April – by 20%.
Is there really such a threat of a GEL 1 billion shortage by the end of 2009?
A. There’s already been a budget change submitted to the Parliament of Georgia, where tax revenues are cut by GEL 500 million. In spite of this the total state budget is increased by GEL 312 million for giving supplementary stimuli to the economy.
As for the statements made by the ex-PM, he also said that in September we would face a serious political crisis. If the opposition plans to make things worse then the investment climate in Georgia will continue eroding and those pessimistic forecasts could become a reality.
Q. In 2008 FDIs declined to USD 1.3 billion, whereas in 2007 they equalled USD 2.1 billion. What level of FDIs does the Government expect to attract in 2009?
A. We looked forward to bringing as much as USD 1 billion of FDIs to Georgia, which is realistic I would say. The investors haven’t backed away from the projects that they planned to implement. They have considerably postponed investments, but are still discussing financing certain projects. Everybody is just waiting for this political turmoil to end now.
Q. In line with the recently made comments by former Minister of Finance, Aleksi Aleksishvili, it’s likely that a significant number of small and medium enterprises will be closing in the coming months. He also suggests that unemployment could spike and key local economic sectors, including real estate and banking, will remain stagnant. How reasonable are these threats for the economy of Georgia in the next six months?
A. If the country gains stability we can say that there’ll be rising economic activity from the third quarter. The thing is that when you’re not in the Government it’s always easier to make more negative forecasts. We are not here for the purpose of expressing pessimistic views and trying to intimidate things.
We are realistically looking at the situation and our forecasts are rational. There are both risks for downturn and upturn of the economy. That’s why I guess Aleksi Aleksishvili is making very conservative statements. He is currently acting as an economic expert and not as the Minister of Finance. Thus it’s up on him to be a realist or a pessimist. Still I think he’s too pessimistic.
Q. Some of the foreign investors regard improvement of the business climate in Georgia in 2009 rather unrealistic. Do you think there are still reasons for optimism?
A. The investment climate is dependent on two factors, one is economic and the other political. In Georgia we have a well established tax system, free industrial zones, and high deregulation and liberalization levels. All those things facilitate in bringing new investments to the country.
The second factor is the political environment. In terms of outer political threats the post-war negative expectations in investors have been neutralized. As time passed they’ve seen that the processes are directed to a peaceful continuation. In this way outer political risks declined, but inner political threats became a serious problem. Today’s situation inside the country is significantly affecting the investor mood. It’s very difficult to speak of attracting new investors, when the issue of the legitimacy of the Government is constantly being questioned.
Just imagine how the ongoing events are damaging the country’s image. The President is nearly left outside of his residence, the Parliament has only just finally managed to gather together, the railway was blocked and many other cases are not acting in favour of improving the investor mood in Georgia. This is a serious impediment.
Q. What is the rate of unemployment for the last six months in Georgia?
A. By the end of this month the Department of Statistics will provide us with the results of unemployment for the first quarter of 2009. Certainly jobs were lost, especially in the banking and construction businesses, but the Government’s stimulation package was directed in a way that we could compensate for the lost positions and facilitate the creation of new vacancies with increased state funding. The statistics will soon show us how successful we were in our activities.
Q. A large portion of the donor’s pledges were directed to the banks, but are these funds enough for covering the credit risks due to which banks are resilient to give out loans?
A. Thanks to the donor’s pledges local commercial banks are now having nearly no foreign liabilities. If we look at the banking sector in Russia we’ll see that because of the existence of liabilities they could soon be facing serious threats. I think that problems with banks are still ahead in Russia, which could evolve by Autumn or the end of 2009.
In fact today banks in Georgia have surplus liquidity, but they are conservative in giving out loans. This is related to the fact that businesses are not expanding anymore and instead of this we have a shrivelling economy. Currently receiving any extra funds are not crucial for banks. They have enough resources to wait until the time the political climate gets normal again and then lending will be actively renewed.
Q. Will the Government reconsider taxation reforms and the tax rate reduction timetable that it had before the crisis?
A. The Government is not going to reconsider the plans of low-tax jurisdictions. Despite the problems we have today, we are still going to gradually reduce the income tax from 20% to 15%.
At the same time we plan to reduce the dividend income tax. The primary aim of the Government is to facilitate the development of private businesses as much as we can, so that companies can have extra funds to invest back into businesses.
Q. A couple of days ago there was an active public debate about opening Georgia to USD and EUR. The idea behind was to boost international investor’s confidence by reducing the risks of exchange rate fluctuations of GEL. How realistic is this change taking place?
A. At this moment the Government is not considering or planning any such changes regarding GEL.
Q. How successful has been the decision of NBG to switch to using FX auctions as its only intervention tool?
A. FX auctions are more effective, modern and flexible than what used to be before. This was the right decision at the right time. It has and will in the future facilitate to strongly integrating the market principles into our national currency rate.
Q. Exports of ferrous metals were leading in 2008 with 31.2% of total exports. What are the perspectives for the development of this sector and how long can the usage of local supplies last?
A. It’s noteworthy to say that while speaking of exporting ferrous metals we’re not entailing exporting scrap-iron. It’s true that in some very limited portions there is export of scrap-iron from Georgia, but it’s mainly metal imported from Azerbaijan and then exported to foreign markets.
Our objective is to additionally increase the volume of production in our export basket. This will create more value inside the country and Free Industrial Zones (FIZ) make the process easier. The creation of FIZs will help us in boosting the export potential of Georgia.
Q. From 2003 the share of exports to the EU has increased from 17% to 26%. How well did the GSP+ with the EU work?
A. Although there’s considerable potential, sadly the GSP+ is not actively used by companies in Georgia. In this case the role of the Government is limited and companies should take the initiative themselves. My advice would be for them to get more interested with preferential trade regime. But if they would rather have trade with other countries and not the EU it’s their decision. Maybe at this stage it’s just more preferable for them.
Q. According to the statistical figures of export-import in 2008 the export of agricultural products had a very small share, if we don’t take into account the export of beverages, spirits and vinegar that constituted 7.7%. In 2008 only 0.8% of total FDI was put into the agricultural sector. Compared to other sectors it’s a very small figure.
What is being done by the Government to make agriculture more attractive for foreign investors?
A. Agriculture will be leading in terms of investments in 2009 along with the energy sector. Foreign investors are increasingly interested in this sector. There are a couple of major problems in agriculture that we are now working on.
One of them is technical replenishment, and the other is the development of SMEs working in the agriculture industry. The latter is supported by cheap credits. Currently we are working more on solving problems in agriculture. Plus the Government has a 100 enterprise programme, which has given rise to great interest among investors. I hope that in the coming years there will be a lot more financing in agriculture than we had in previous years. As a result its share in GDP will increase.
Q. In 2008 exports to Ukraine were 7.6% from total figure. However the outlook on trade with Ukraine was way more positive than numbers show today. After Russia stopped supply of gas to Ukraine, the EU was left without gas and there was more than just a little panic about it. Since then Ukraine has been more moderate in openly supporting Georgia, maybe just to avoid irritating Russia. How negative has the Russian factor been on the economic relations between Georgia and Ukraine in the last few months?
A. The Russian factor had no influence on the economic relations of Ukraine and Georgia. There was a friendly relationship between Georgian and Ukrainian businesses which has continued up to today.
Written By Levan Lomtadze
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