OUTLOOK 2019 Georgia

OUTLOOK 2019 Georgia
By bne IntelliNews December 21, 2018


Just for a moment there in late November, there was a feeling following Georgia’s presidential election runoff result that enough people might take to the streets to bring about a political crisis. Defeated opposition candidate Grigol Vashadze, who had looked to be in a very promising position after the first round of voting, alleged electoral irregularities. He called for mass protests and a snap parliamentary election while his supporters drummed up a Tbilisi rally. Outspoken ex-president of Georgia, the self-exiled, peripatetic Mikhael Saakashvili, egged Vashadze on, and said it was necessary to mount a campaign of civil disobedience.

Alas for Vashadze and Saakashvili, the momentum fizzled out and the victor, Salome Zurabishvili—the independent candidate strongly endorsed and financially backed by the Georgian Dream party that leads the government coalition—proceeded to her inauguration as Georgia’s first woman president in relative peace (at least in comparison to what had been threatened).

Between the first round and the runoff, the billionaire oligarch and former PM who leads Georgian Dream, Bidzina Ivanishvili, took no chances. He massively stepped up his backing of Zurabishvili, intent on his party not only controlling the government but having its favoured candidate in the presidential palace. That’s been achieved, but looking ahead, will the former foreign minister Zurabishvili be entirely loyal?

"[S]he is not a totally known quantity. She might just go rogue and become more independent than [incumbent Giorgi] Margvelashvili," Max Fras, an expert on Georgia and visiting fellow at the London School of Economics’ European Institute said in remarks made after the election.

Given the brief war the Georgians and Russians fought in 2008 over breakaway territories, and the tensions that regularly flare up over Tbilisi’s insistence that it wants to join Nato, Russia is of course never far from Georgia’s mind. Zurabishvili is thought to have won many votes from those Georgians wary of the Saakashvili/Vashadze tandem provoking the Kremlin. She has been accused of making thinly-disguised pro-Moscow comments, but insists she simply wants to balance relations between the East and West.

Mind you, if anything, German Chancellor Angela Merkel proved a help on that score when she visited Tbilisi in late August. Merkel left many Georgians nonplussed by showing a lack of commitment to their country’s Nato aspirations. “I don’t see Georgia becoming a Nato member any time soon,” the chancellor told an audience of students at Tbilisi State University.

Merkel has also sounded the warning to Tbilisi on how it must curb flows of migrants heading to Germany and other EU states where refugee status is often claimed. To help achieve this, Merkel said she wanted Georgia to be classified by Brussels as a "safe state of origin". In December a comment piece in Resonance Daily reflected on how many Georgians have left their homeland, stating that more than a million Georgians are employed abroad, both legally and illegally, while only 825,000 Georgians work in Georgia.

Though the powers of the presidency have been cut under a new Georgian constitution, the incoming president is still expected to play a critical role in addressing widespread suspicions of the prevalence of corruption in Georgia’s judiciary. Zurabishvili has the power to appoint three judges to the constitutional court and a member to the high council of justice. Such appointments can tip the balance of power and give the judicial system more integrity—or less. 

Georgia has so far successfully tackled low-level corruption to gain a high regional ranking, but more efforts are needed against high-level corruption, according to a resolution endorsed by the European Parliament on the European Union – Georgia Association Agreement in November. “[H]igh-level elite corruption remains a serious issue [in Georgia]”, the resolution reads.

Georgia’s parliamentary elections are now not so far away, scheduled as they are for the end of 2020.


Georgia, a country of just 3.9mn people, saw GDP growth of 4.8% y/y in January-September 2018. The International Monetary Fund (IMF) in its latest World Economic Outlook edition, released in early October, revised its forecast for Georgian growth in 2018 to 5.5% from the 4.5% it projected in April. Some independent projections put the country’s expected finalised growth for 2018 at above 6%, but caution is required because the extent of the fallout from Turkey's lira crisis and wider economic travails remain hard to assess.

Georgia, GDP growth. Source: World Economic Outlook, IMF.

Georgia’s lawmakers passed the 2019 budget in mid-December. It targets a deficit of 2.6% of GDP on assumptions for GDP growth of 4.5%. Growth of 5% was recorded in 2017 after the economy bounced back from slow growth across 2015-2016, when the region’s depressed economic environment linked to low oil prices indirectly impacted Georgia’s performance.

According to its 2017 GDP per capita measured at purchasing power parity ($10,664), Georgia ranked 105th of 187 countries surveyed by IMF. That placed it above its neighbour and fellow small nation in the South Caucasus, Armenia ($9,898), and neighbour across the Black Sea, Ukraine ($8,656). But the performance even pales in comparison with that of the least-developed European Union country, Bulgaria ($21,578).

The growth spurt across 2015-2018 was prompted by a flurry of domestic and foreign investments in construction, retail, infrastructure and real estate amidst a recovery in consumption levels and a marked increase in foreign tourists. 

However, structural imbalances continue to plague Georgia's macroeconomy, most notably the country’s large trade deficit, which is financed partly with external borrowing and sizeable remittances from Georgians working abroad, and its unpredictable currency, the exchange rate of which has varied widely.

In the 12 months ending November 2018, Georgia's exports rose by 25.9% y/y to $3.3bn. Its imports advanced at a lesser 16.4% y/y, but at a very high value of $9.1bn. The trade gap thus expanded by 11.6% y/y to $5.8bn, equivalent to more than one-third of the country’s GDP.

Reducing the foreign trade shortfall and overall current account deficit remains an ongoing concern for Tbilisi. As an oil and gas-importing country, Georgia has struggled to expand its manufacturing base enough to make up for its sizeable energy imports and for its imports of higher added-value goods.

Consumer prices in Georgia increased by 2.3% y/y in October, easing from the 2.7% y/y rise seen in September. Headline inflation thus dropped to its lowest level in nearly two years, with prices having hovered at a steady level throughout the year. According to current forecasting, inflation both this year and in the medium term will fluctuate around the central bank’s target rate of 3%.

The monetary board of the National Bank of Georgia on October 24 decided to keep the refinancing rate unchanged at 7.0%. Annual inflation in Georgia decreased at the beginning of 2018 and, in line with previous forecasts, remains within the target rate of 3%, the central bank said.


The IMF Board in December endorsed the third review of the three-year Extended Fund Facility (EFF) with Georgia signed in April 2017. The Fund disbursed a further $41.6mn tranche of the $166.3mn attached loan. Programme implementation through end-June this year was satisfactory and the EFF arrangement remained on track, reflecting prudent macro-financial policies and sound reform implementation, the Fund said.

Georgian authorities should remain vigilant to the deteriorating external outlook to sustain reform efforts at promoting more inclusive growth, it added. Efforts to build international reserves need to be stepped up given the heightened external uncertainty and Georgia’s vulnerability to external shocks. Priorities, according to the Fund, included adopting a new corporate insolvency law.

Fitch Ratings affirmed Georgia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘BB-' with a positive outlook on August 24, it said in a statement. Fitch said the positive outlook reflects Georgia’s favourable growth prospects and the steady improvement in the country’s public finances. 

Looking at possible impacts from neighbouring economies, Fitch pointed out that Russia and Turkey are Georgia's second and third largest trading partners, accounting for 14.5% and 7.9% respectively of total exports in 2017, as well as being “important sources of remittances, foreign direct investment (FDI), and tourism revenues”.

Georgia’s external finances remain significantly weaker than the majority of its ‘BB’ rated peers, the rating agency cautioned, mentioning the country’s large current account deficits and low external liquidity that leave the open economy vulnerable to external shocks.

The country’s two big banks remain LSE-listed Bank of Georgia and TBC Bank. Q3 results showed that in terms of profit they remained almost neck and neck, with the former reporting GEL113.3mn ($43mn). The business of both banks expanded by more than 20% y/y by the end of September in terms of the loan portfolio.

Clearstream Banking, the international central securities depository (ICSD) based in Luxembourg, in September started offering settlement, custody and asset servicing for selected Georgian corporate bonds, a press release from the depository said.

Business and trade & investment potential

Source: World Bank's Doing Business 2019 ranking.

Georgia remains a top performer in the World Bank’s Doing Business Survey. In November it was announced that it had climbed three places to rank sixth out of 190 economies in the Doing Business 2019 ranking. In terms of the ease of starting a business, only New Zealand offers a smoother experience than Georgia, according to the survey. Georgia has also made paying taxes easier by levying income tax on distributed profits rather than on taxable profits.

Where collaborating with neighbours other than Russia in trade and investment is concerned Georgia has very much fallen in with Azerbaijan and Turkey rather than Armenia, which given the unresolved Nagorno-Karabakh frozen conflict does not have diplomatic relations with either Baku or Istanbul.

The “golden triangle” cooperation achieved a long-sought milestone in late 2017 when the Baku-Tbilisi-Kars (BTK) railway was opened. Freight traffic is being developed along the 826-km route. 

The infrastructure came in the wake of the Baku-Tbilisi-Ceyhan oil pipeline and the Baku-Tbilisi-Erzurum gas pipeline. Its initial capacity was 1mn passengers and 5mn tonnes of freight a year, but there are plans to boost this as high as 3mn passengers and 17mn tonnes of freight by 2034. 

Also in the South Caucasus, China’s massive One Belt One Road (OBOR) trade infrastructure initiative is (very) slowly emerging. Georgia will keep pushing to become an important link in the OBOR Eurasian ‘landbridge’ that Beijing eyes as essential to driving up its exports to Europe. It can help Tbilisi lower its dependence on Russia as a trade partner.

However, Georgia’s prime minister, Mamuka Bakhtadze, has cautioned that the development of Georgia’s maritime transport sector is of vital importance to realising the country’s transit state ambitions. Bakhtadze in June lamented the depletion of the Georgian fleet in recent years. “We are excited over the fact that interest in seafaring in Adjara, and in other regions, is growing, which we must further cement and strengthen. Unfortunately, the once strong Georgian fleet has practically collapsed,” Mamuka Bakhtadze said, according to a government statement

Georgia makes more and more international headlines as a holiday destination newly discovered by tourists but the government has warned that many of its summer and winter resorts are unprepared when it comes to coping with the growing number of holidaymakers. Ministers say they are allocating funding to upgrading resort infrastructure, with projects to include an upgrade of the Kobi-Gudauri ski slopes, and rehabilitation of rural roads. 

Visitors often praise Georgia’s wine which is increasingly found on international markets. In October, it was reported that Georgia was expecting the biggest wine production hike among all the main wine producers, with the 2018 harvest expected to come in at 2.0 mhl—up 57% compared to 2017. 

In property, the m2 real estate division of Georgia Capital investment fund confirmed in December that it is to develop the “largest ever” residential project in Tbilisi, with around 3,000 apartments, and a 125-room hotel in Kutaisi. Georgia Capital is a London Stock Exchange-listed investment business demergered from Bank of Georgia in May. Equity worth $500mn was raised on the LSE by Georgia Capital. It has also issued five eurobonds worth $1.5bn and raised more than $3bn from international financial institutions such as the European Bank for Reconstruction and Development (EBRD) and the International Financial Corporation (IFC). 

In privatisation, Georgia is to privatise its postal services run by Georgian Post. The country’s railway transport company, meanwhile, will be unbundled, its railway transport market will be opened up to private operators and its electricity system privatisation might resume.