| Biggest Risks that Investors Face in Georgia |
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05/10/2009 11:15 (859 Day 11:39 minutes ago) | |||||
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The FINANCIAL -- Political and economical instability and permanent changes to the law are some of the biggest risks that investors face in Georgia, so claim experts interviewed by The FINANCIAL. However it is believed that the situation is not as bad as it may appear to potential investors.
Georgia is now ranked eleventh in the world for the Ease of Doing Business according to the most recent report of World Bank and IMF. In 2005, it took 21 days and cost 46.8 percent of the average Georgian’s annual income to start a business, making it time consuming and costly for small business owners to stimulate growth. Now, an entrepreneur can start a business in just 3 days, with only 3.7 percent of their income. The time it takes to export products has been reduced by 44 days to just 10 days, and the time it takes to import has been reduced by 39 days to 13 days.
“The Russian threat is a very big risk for investors, particularly taking into account the August 2008 war, which showed the world that Russia is prepared to mobilise its military force, but also taking into account the hostile stance that Russia has taken since then,” says economist George Bakradze.
According to Akaki Kheladze, Doctor of Graduate Studies at Caucasus University (CU), the country’s risk factor is one of the major deterrents that investors face in Georgia.
“The country’s overall risk includes political risk and economic risk. This factor is considered one of the main issues hampering investors aiming to do their business in Georgia,” Kheladze says.
“The most major risks for investors in Georgia are the political conditions in the country; both the local problems, so too the conflict with Russia,” Tavadze told The FINANCIAL.
The Multilateral Investment Guarantee Agency (MIGA), the political risk insurance arm of the World Bank Group, and Georgia’s Investment Risk Management Agency (IRMA), last month signed a Memorandum of Understanding aimed at promoting foreign direct investment (FDI) into the country. According to the Georgian Statistics Department, FDI into Georgia fell to USD 124.7 million in the first quarter of 2009, down from USD 537.6 million in the same period of last year.
MIGA and IRMA will provide risk assessment services for proposed investments. MIGA may provide political risk insurance for eligible investors and projects and will train key IRMA personnel and provide technical assistance for the development of risk-mitigation products and instruments.
“Easy access to mitigating political risks will stimulate foreign investment activities which are very essential to economic growth and development in Georgia,” Kakha Baindurashvili, the Minister of Finance of Georgia said.
According to Zurab Simonia, Director of the Investment Risk Management Agency “IRMA is in a very strong position to promote MIGA’s products in Georgia and facilitate acquisition of political risk insurance by foreign investors.”
“Often changes in the law are quite unacceptable for investors,” says Akaki Tavadze, Management Program Teacher of Free University. “They should be sure that if any problems occur, then the court handles the problem in an efficient and just manner.”
“I’d also cite the problem with the rule of the law. Although I don't believe that the situation is as bad as it is often described. Investors assess the situation based on the information they have, so the problems with property rights and such like would be considered by them as quite a serious risk which they could face when investing in Georgia,” Bakradze says.
According to George Bakradze there are also risks related to the macroeconomic stability of the country.
“As a result of the crisis, the foreign debt of Georgia is increasing, the interest rates have risen sharply, terms of trade have deteriorated, and Georgia has become much more vulnerable to external shocks. All this is definitely a serious risk and might prevent investors from investing in the country,” Bakradze says.
According to Kheladze a lack of skilled personnel is also considered one of the biggest risks that investors might face in Georgia.
“In general there is a problem with finding good personnel in Georgia and generally additional training is needed, which is not really acceptable for investors when starting up their business,” Kheladze says.
The local currency is thought to be one of the most major risks for long term investors aiming to start their business in Georgia.
“Instability of the local currency might also be a risk for investors. At the moment the GEL is quite stable, but foreigners who plan to build up long term business here do tend to think that the instability of the GEL is an obstacle for them,” says Tavadze.
According to Bakradze, another risk is that investors are often complacent and assess only economic features of the investment, not taking into account the country-specific features, which, particularly in the case of Georgia, should seriously be taken into consideration. Thus they should take into account the fact that they need quite a deep knowledge of the country they are investing in if they want the investment to be profitable. This is especially true since apart from banking most of the investment in Georgia is in the realty sector.
Most attractive Georgian spheres to invest in
According to Kheladze, CU, the banking sector is one of the most attractive for foreign investors. Akaki Tavadze, Free University, agrees, but says that there is no room left in the banking sector for investment.
“In the banking sector we have Societe Generale Group and HSBC bank which is quite enough for a country the size of ours,” Tavadze says and adds that free economic zones are some of the most attractive areas of interest for investors in Georgia.
The creditworthiness of Georgia’s “small and underdeveloped” banking industry is “highly risky,” Standard & Poor’s said, citing factors including political instability and sensitivity to external shocks. S&P’s rating reflects “significant industry and economic difficulties” facing Georgian banks, such as high inflation and the “substantial dollarization of operations,” credit analyst Magar Kouyoumdjian said in a report published recently.
“I’d put tourism at the top of the list. Georgia also has great potential in hydro-power, which is something that local investors would (and should) be more interested to invest in,” George Bakradze explains.
According to Tavadze, if Georgia wants to attract investors it first of all has to stabilize the political environment.
“The perfect solution to attracting investments in Georgia is stabilization and resolution in terms of the country’s territory,” Kheladze says.
“As for Georgia-specific reasons, I would like to emphasize the positive image that our country gained since thee Rose Revolution of 2003, which, until the crisis and the August war, was one of the main reasons (and the most important non-economic one) why investors were eager to invest in Georgia despite all the associated risks,” Bakradze notes.
According to Bakradze the global crisis has significantly reduced the capital flows in Georgia and this being an exogenous shock is beyond our influence.
“Still, improving the situation in the judiciary system, in particular, related to the property rights, would certainly make the Georgian economy more attractive. Macroeconomic stability, even in the face of crisis, is very important as well, and the National Bank of Georgia is in my opinion doing quite well so far,” Bakradze told The FINANCIAL.
Recovery in emerging markets is likely to be weak and growth will remain limited, a senior World Bank official said on Thursday. “So far there have not been any major policy reversals in emerging markets...recovery is going to be weak, growth slow for the medium term.”
Written By Tako Khelaia
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