From dealing with the effects of the pandemic, to an economy on the rebound, Georgia is moving forward.
Despite suffering from one of the world’s highest infection rates and low vaccination rates during the pandemic, Georgia is on a sure path to economic recovery.
The country—one of the most diversified, dynamic and globally connected in the southern Caucasus region—will at least have a sound basis from which to start. Fitch Ratings affirmed Georgia’s sovereign rating at BB with a stable outlook in February, following a change from negative last August, amid signs that the nation of nearly 4 million people is doing better than had been expected.
“Overall, Georgia has weathered the pandemic shock exceedingly well. Our outlook reflects the strong growth and the fact Georgia was able to shore up a lot of donor support,” says Kit Yeung, associate director of Fitch Ratings’ sovereign group. “The macro stability and high FX [foreign exchange] reserves at the central bank—key for such an open country with high levels of dollarization, around 58%—were other pluses.”
Most of the indicators had a surprising upside, agrees Otar Nadaraia, chief economist at TBC Bank in Tbilisi. “The economy rebounded at a speed that exceeds even the most optimistic scenarios,” he says. “Importantly, the recovery is broad-based; and this is reflected in all sources of inflows as well as in domestic demand.”
Georgia’s full-year GDP growth for 2021 was 10.5%, which compensated for its 6.8% decline in 2020. Meanwhile, its growth projections for 2022 vary between 5.5% and 6.5%, above its neighbors.
The broad-based growth suggests sustainability over the medium to long term. Moreover, such growth may reduce the country’s stubbornly high unemployment rate—18.5% in 2020, while the youth unemployment rate reached 39.7%.
The export sector has been particularly dynamic, with sales abroad rising 27% to reach $42.4 billion last year, natural resources and agribusiness leading the way. Georgia’s fast-growing wine sector now contributes nearly 10% of exports. Hazelnuts are also a significant FX earner, with Italy’s Ferrero Group purchasing much of the crop for its Nutella spread.
Trade Agreements’ Central Role
Although imports also jumped, reflecting strong domestic demand for cars and consumer goods, Georgia’s account deficit should narrow later this year as tourism recovers to 2019 levels. The sector pretty much collapsed in 2020 and only earned $1.24 billion, or 38% of the pre-pandemic level, in 2021. Experts predict that the industry will reach 80% of the pre-pandemic level by the end of the year.
“It is remarkable that Georgia’s growth rate last year was as high as it was, given the collapse in tourism earnings,” says Dimitar Bogov, Eastern Europe and Caucasus economist for the European Bank for Reconstruction and Development. “Its recovery will be important for FX earnings and also the wider economy.”
Georgia is well placed to see a big pickup in manufacturing and exports of manufactured goods as it has free-trade agreements (FTAs) with China and the EU and close trade ties with its neighbors, including Russia and Turkey. Companies from China and the EU may find the country ripe for nearshoring operations, given its low-cost, generally well-educated and multilingual workforce.
“There are big opportunities; appropriate policies coupled with the FTAs can be very beneficial. But there are clear challenges before Georgia can become a more significant part of the EU supply chain,” says Bogov.
Logistics remain a high hurdle, since the country needs improved roads and access to a deep-sea port. The government ended the development of its much-vaunted Anaklia Port project in January 2020 and has repeatedly failed to upgrade the port facilities in Poti.
He adds that Georgia needs more regular shipping services to countries like Romania and Bulgaria that can send goods onward to the EU. “Georgia is a small country. It would be better, perhaps, if it worked more closely with Armenia and Azerbaijan—maybe using EU Eastern Partnership funds—to enable the future realization of a deep-port project. And a larger mass of goods for export would help make such a project more commercially viable.”
TBC Bank’s Nadaraia agrees that it would be prudent for Georgia to take greater advantage of its FTAs with China and the EU. “To do this, we need to increase production capacity. I am a fan of the government incentivizing the private sector to discover new activities and markets. However, such an approach contains risks if not implemented properly.”
Georgia’s wine industry managed to reinvent itself after Russia, its primary market, halted imports in 2008. Producers significantly boosted quality, moved away from sweet vintages popular in Russia and focused on native grape varieties like Saperavi and Rkatsiteli. The country now has 374 producers that export 72 million bottles to 62 countries globally, compared to 19 million bottles a decade ago. Wine is now arguably Georgia’s most recognizable product and the country’s third-biggest foreign-currency earner, as well as sporting Unesco’s official protection of its historical winemaking process.
The wine industry’s success was built on government support for a dynamic and interested private sector, with a clear strategy. With foreign direct investment (FDI) increasing once again in Georgia, the country is well-positioned for similar success, according to David Tavlalashvili, head of Investment Department at Invest in Georgia.
“Since the pandemic, the government has implemented support mechanisms for almost all sectors,” he says. “We have also seen interest from potential investors go up since the second half of 2021, and FDI will provide additional fuel for growth.”
The inflow of FDI from the EU and China has been increasing since 2016. But while “more and more companies are utilizing these opportunities,” capitalizing fully on the FTAs will require time, Tavlalashvili adds.
Some progress has been made toward improving logistics within Georgia, such as the Baku-Tbilisi-Kars railway line that connects Georgia to Azerbaijan and Turkey and the block train that connects Georgia to Xian in China. Global logistics company AP Moller-Maersk was an early user of the link and shipped 41 containers from China to Georgia by rail, which arrived on October 2, 2020, as part of Beijing’s Belt and Road Initiative.
“Along with services, we are actively working on attracting manufacturing projects, which would leverage our FTAs with very low cost of operations due to low taxes and low utility and labor costs,” says Tavlalashvili. “We are seeing interest from automotive, aerospace and electronics companies. Traditional sectors like hospitality, logistics and energy will stay an important part of the FDI mix for the foreseeable future, for sure.”
The Road Ahead
International donor support for Georgia is set to continue, which is essential for a country with such a high level of dollarization, a high current account deficit and relatively high external debt.
The Georgian government is being urged to move faster in crucial areas of reform, including a more independent judiciary and an improved business environment.
“Some key indicators on corruption and judicial independence deteriorated,” says Fitch’s Yeung. “So far, this has not shown to impact on the government’s commitment to structural reform or the credibility of Georgia’s macro policy framework, both of which are important to sustaining relations with the international donor community.”
Georgia ranks 74th out of 140 countries on the World Economic Forum’s Global Competitiveness Index, five positions below Armenia. However, its pro-EU and pro-Western stance in such a volatile region—with Russia dominating its northern border—counts for a lot, even with the current political polarization, which critics say is hampering Georgia’s overall progress.
“We have signed association agreement with the EU, which means that we took on the obligation to bring our legislation in line with Europe law over time. More than 150 laws and sublaws towards EU legislation have already been adopted and it is declared a political priority of the state to apply for EU full membership in 2024. This means reforms will continue,” insists Tavlalashvili.
The nation’s bitter political environment still raises concerns regarding the governing coalition’s drift toward authoritarianism following controversial parliamentary elections in late 2020. Local elections in October 2021 further consolidated the Georgian Dream-Democratic Georgia party’s hold on power against a divided opposition headed by the United National Movement party. Such political volatility remains a distraction for the politicians and a worry for investors.