The FINANCIAL -- Refined petroleum, crude petroleum, cars, vehicle parts and petroleum gas - is a list of products that Georgians can export to the world’s seventh largest economy, Brazil. Currently Georgia has only one product - ferroalloys - that is exported to Brazil. While Georgia continues to see a reduction of export, due to its reliance on CIS countries, experts suggest trying this market of 200 million people.
“The GDP per capita (in PPP terms) in Brazil is about USD 14,555. Georgia in contrast has a GDP of USD 16.2 billion, which is about 138 times smaller than Brazil. (If the economy of Georgia is compared to the size of the Earth, then Brazil would be the size of 12 Jupiters!) Trading on such a large market is of course very beneficial for a small country like Georgia,” said Yaroslava Babych, Assistant Professor of Economics at ISET - International School of Economics.
The Brazilian market for Georgian exporters is still underdeveloped. According to official statistics, the export rate was highest in 2007. Export from Georgia to Brazil was worth USD 9.3 million that year. There were years when products to Brazil from Georgia have not been exported at all. For example, in the years 2002, 2003, 2004, 2005, 2011 and 2012.
In 2014, export was worth USD 4.5 million. In the first 2 months of 2015, exports amounted to USD 3.5 million. During the last two years only ferroalloys has been exported to Brazil. Consequently, due to the demand the main focus should be put on this product.
Like Babych, Zaza Chelidze, Consultant at Policy and Management Consulting Group (PMCG), said that as Brazil has Latin America’s biggest market, entering such a large market for all of the country’s economy is useful, especially for such a small country as Georgia.
“At the same time, Brazil is one of the largest manufacturers and exporters of agricultural products in the world. For example, the country is the largest importer of agricultural products to the EU. Accordingly, the amount of imported products from Brazil to Georgia is big. During the past decade the average annual import value was USD 90 million. Georgia is mainly importing sugar, meat, tea, coffee, and a variety of food products from Brazil,” said Chelidze.
While discussing the potential of the Brazilian market for Georgia, experts underline a few caveats. “The first is the geographical distance between countries, which translated into high trade costs. The other has to do with more subtle barriers to trade, such as lack of common language, cultural traditions and simply a lack of familiarity with the other country’s market,” said Babych.
“For example, Georgian wine is well known and liked in the former Soviet Bloc countries, but it may take a lot of time and effort to convince Brazilians (who are also large and well known wine producers) to buy Georgian wine,” she said.
Hence, Babych believes that in the short term Georgia is able to easily export products that do not require branding - such as commodities in the primary and secondary sectors: e.g. metal ores, ferroalloys, gold, raw agricultural produce, etc.
According to Chelidze, although Brazil implemented the liberalization reform of trade, entering this market requires complicated formal procedures. “I mean complicated procedures for getting import licenses. Brazil has imposed high import tariffs on agricultural products. Brazil is a member of the WTO and has a free trade agreement with the European Union and almost all the neighbouring states,” he explained.
According to GeoStat, external merchandise trade (excluding non-organized trade) of Georgia amounted to USD 2,279 million in January-March 2015 (preliminary data), decreased by 10 percent from the same month of the previous year. The value of export decreased by 28 percent reaching USD 503 million, while the import decreased by 3 percent and amounted to USD 1,776 million with respect to January-March of the previous year. The trade deficit equalled USD 1,273 million and its share in trade turnover constituted 56 percent.
Georgia is currently an exporter of: refined petroleum products (USD 373 million value of exports, 11% of country’s total exports); nitrogenous fertilizers (USD 146 million worth of exports, 4.5% of total exports); ferroalloys (USD 266 mln, 8.1%); packaged medicaments (USD 47 million, 1.4%).
“The problem is that Brazil itself is a resource-rich country. For example, Brazil is one of the largest exporters of ferroalloys. The country exports USD 2.6 billion worth annually in this product group. Brazil also has large manganese reserves and in this regard is Georgia’s competitor on the world market,” said Babych.
Meanwhile, Babych underlined some good news. “Brazil is also one of the top importers of nitrogenous fertilizers, importing USD 2.2 billion annually. In addition, Brazil imports large amounts of refined petroleum products, and packaged medicaments. Georgia can definitely try to tap into these markets,” she suggested.
“While the possibility of deeper trade ties with Brazil is a good prospect, it cannot quite make up for the bigger problem - Georgia is still one of the world’s most unsophisticated economies - ranked number 78 among 144 countries on the Economic Complexity Index. This means that Georgia exports relatively few products, and these products in turn are exported by countries whose economies are not well diversified,” Babych said.
“What Georgia really needs is capital investment in new, more sophisticated, knowledge-intensive industries. This type of investment is the only way towards long-term sustained growth and future economic prosperity,” Babych told The FINANCIAL.