The FINANCIAL-- Due to the ongoing situation in Russia and Ukraine, investors targeting emerging markets will consider Georgia a good alternative, believes Dr. h.c. Sascha Ternes, Board Member and Interim Managing Director of the German Business Association in Georgia and Armenia. However, mentioning the potential threat from Russia alongside the nice investment climate of the country and nice macro-economic situation in Georgia is considered a conflicting message that might confuse investors. Closing ties with the EU has increased the attractiveness of Georgia for foreign investors. Meanwhile, blaming the EU when implementing hard decisions is risky as it can cause among the population negative impressions towards the West.
Mr. Ternes is very optimistic about the future perspective and development of Georgia and believes that the existing tensions will be solved peacefully. “If we believe in peace, we should also create this environment for our partners and investors. We should attract them, not scare them later,” Sascha Ternes, Board Member and Interim Managing Director of the German Business Association in Georgia and Armenia (DWV), told The FINANCIAL.
The German Business Association has been working in Georgia since 2007. It incorporates approximately 140 member companies, and recently hosted two delegations from Germany. “The German Ministry of Economy, together with DWV, identified that it would be interesting for German construction companies and those which are involved in construction materials, to explore the Georgian market. The second delegation was from ENA (European Network Architecture), which is a German based group of various engineers, architects and also construction companies. They are our members and they expressed willingness to present Georgian potential to other German companies. So, the visit of these two delegations was based on their interest in the Georgian market,” Ternes explained.
During the visit of the business delegation, European Network Architecture concluded a memorandum of understanding with local partners on establishing a local organization, to provide services and conduct projects in Georgia. In parallel, on 20th May 2015 the “Expo Germany” took place in Tbilisi. According to Ternes, during the exhibition a lot of contacts were made and preliminary discussions took place about concrete projects. A couple of successful deals were concluded. It was the fifth exhibition of German companies in Georgia since the establishment of the organization. 54 German companies (members and non-members) participated in the exhibition.
In 2014, the volume of German FDI to Georgia amounted to (minus) -2,969,400. This is the worst data shown in statistics for the last decade. The figure was USD 21,828,300 in 2013, and USD 139 million in 2012.
Q. What are your expectations of FDI to Georgia in 2015?
A. International experts are currently being slightly careful with their prognoses. The Georgian business environment is very much under the influence of the situation developing in the region, especially in Ukraine and Russia. However, my opinion about it is positive. Georgia has always been and still is a nice place to do business. Within the region it is the location that offers the best conditions for doing business. So, while there will be some investors that are afraid of the entire region, those investors who are still looking for opportunities to do business in an emerging market, but are wary of the Russian or Ukrainian markets, will definitely come to Georgia. For them Georgia will be a very nice alternative. The advantages of the Georgian market are well expressed in GDP growth forecasts. It was reduced a little bit by the international forecast, but still remains the highest in the region. I hope that the FDI to Georgia in 2015 will be no less than it was last year.
Q. Does Georgia seem like a good replacement of Ukraine and Russia for foreign investors?
A. I do not think of it as a replacement, but as an alternative. Investors who go to Ukraine or Russia are looking for special markets. They are looking for markets that offer high benefits, high profits, because these are emerging markets. So, if they do not go there, but still want to go to the Eastern part of Europe, then there are not too many choices, and in the Caucasus region in particular - Georgia is a good alternative.
Q. In which countries out of our region are German businesses dominating?
A. In the region, Russia is the country which we have the major share of investments in. As for the Caucasus region, there are lots of German investments and business activities in Azerbaijan. However, currently we are witnessing big interest in Georgia.
Q. When will the ordinary Georgian population see the benefits of the AA and DCFTA?
A. Probably everybody knows that this process might take many years. In the meantime what I do not like is that very often whenever there are some problems, or some difficult decisions to be made, they are often blamed on the EU. Very often this is not correct. It is frequently used as an excuse. This is not helping to create a positive impression of the EU. These steps of integration into EU structures must be viewed as an investment. Every investment made at the beginning is expensive and takes time. However, whenever this investment is over, it starts to pay off. So, the next few years will be a time of investment for Georgia and its population. However, later on we will receive huge benefits. What we can already see is visa-free travel, which I am very optimistic will be accepted soon. It will be a very big step forward and a very big achievement. Another immediate result from this agreement has been the DCFTA deal. All Georgian companies can now export their products to the EU without needing to pay any taxes. This agreement has helped the country to become more attractive. Other countries have no access to the more than 500 million-strong market. Probably this is not being communicated enough.
However, Georgia still has to develop further competitive products. If the country wants to export products to the EU, it needs to meet their quality and price expectations. This is also a process that will take time, until you have the right product, right quality and certificates. The opening of the EU market was very good and important. However, now local producers need to start creating products that are in line with EU demands. Georgia is not a big producer, although the agreement with the EU can be an additional stimulus for starting production that can target the EU market.
Q. How did the GEL’s devaluation impact on German businesses operating in Georgia and has it been reflected on potential investors?
A. If we look at the Euro exchange rate, currently it stands around 2.50 GEL against 1 EUR. This rate is not much different from what it was one year ago. It is not so dramatic. For German investors the Euro is important. If we look at the USD, we will see a big devaluation of the Georgian Lari against the US currency. The question is: is it only a devaluation of the Lari, or is it also because other currencies have become stronger? I personally, always think in Euros. It is because I have been living in Germany and my savings are in Euros. The Euro’s devaluation against the USD brought the same loss for me as it did for those Georgians that are linked to the Lari. So, as German investors are Euro-oriented, the currency change in Georgia does not make a big difference to them.
Q. Is the Georgian workforce meeting the demands of Western businesses?
A. The expectations of employers are being partly met. Investors and companies are finding highly motivated people. This is very important. However, the education that Georgians have is very often just theoretical. The majority of people have a university degree. They have lots of theoretical knowledge, but practical experience is lacking. You will rarely find someone who can work in a specific technical direction. In this case, companies have to deal with this issue by undertaking on-the-job trainings themselves, or else the creation of a more structured vocational education is needed. In this regard we are currently planning a deeper cooperation with the German Corporation for International Development (GIZ) and also the Ministry of Education, to develop vocational training. Besides we are the official Representative of the program “Senior Experten Service (SES)”, offering the help of German experts in various specific directions. We already implemented more than 40 projects in Georgia and gave Georgian companies the opportunity to train professional skills of their employees. In addition, the German Business Association was one of the founding members of the German International School Tbilisi. It is working in line with the German curriculum whereby graduates get a German education and an internationally recognized diploma.
Q. You already mentioned a lack of practical knowledge among job applicants. In your view, what should be done by the Georgian education system in order to solve this imbalance?
A. Young people aged 18 tend to go to university. It is probably due to the expectations from parents - that their children have to gain a diploma of law or economics. What we all have to try to do, is make it more attractive to go into vocational education. Youngsters have to try to learn to be a farmer, technician, builder or baker by profession, for example. Making these professions attractive is really important. People very often do not recognize these professions as real jobs. However, if it really becomes as attractive as going to university then we will witness a big change. A change in society’s mentality is important for that. On its side the Government should provide many more educational structures in these fields. In Germany, it is not the majority of the population that goes to university. Instead, the majority of people goes into such vocational training. For many people this is even more interesting, because they can immediately start earning a salary. Meanwhile, people who go to university have to wait maybe five years before they can start earning a wage. The German educational system is promoting a “dual system”. It means that during the week people spend two days at school, to get theoretical skills, and spend three days going directly to work in a company to learn by doing. This combination offering theoretical and practical knowledge lasts for two or three years and is a very nice combination. So, in my opinion it would be worthwhile to promote something similar in Georgia.
Q. Besides investments, what are German businesses bringing to Georgia?
A. Whenever investors arrive in the country, they provide cash investments and also lots of know-how and technology transfers. We can see it in any kind of business, regardless of the sector in which they are operating. When they are bringing their experience and knowledge, they are doing something for the local market. They are improving standards, procedures and capabilities of staff which contributes to extend the market. Companies also invest a lot in the training of staff. So, education is important. We have a couple of members that are very actively engaged in trainings. With all of these activities the overall market conditions will improve a great deal.
Q. Why would you recommend German businessmen invest in Georgia?
A. First of all the market is strategically located. Being at the crossroads of Europe and Asia is a very good and strong argument. It is also the possibility that Georgia is used by many countries as a main location for both Armenia and Azerbaijan, because of the conflict between these two countries. Georgia is also a very good entry gate to the landlocked areas of Central Asia; most of them use Georgia as a transit corridor. In addition, if we look at the fundamentals of the Georgian economy, there are not so many countries worldwide that have had such a robust and stable development of their economy. During the past 20 years Georgia has only once had a relatively small contraction of GDP. It was in 2009. Since that period the country has always had growth. The country’s potential is also greatly supported by the very welcoming population and competitive labour and energy costs. There are plenty business opportunities in many sectors. Democratic, efficient, business-friendly and corruption-free public institutions are a good basis of doing business easily.
Q. There is always room for improvement. What more should be done by Georgia in order to maintain its competitive advantage?
A. It is highly recommended for the Government to be even more specific and concrete in the development of some key economic sectors. Despite the existing social-economic development Strategy “Georgia 2020”, I personally would hope for more practical steps to develop the key economic sectors. If the country would consolidate all of its efforts and would target a big master-plan, then it would be much more beneficial for the country. It is currently time for Georgia to approach the next generation of reforms.
Q. How can the country fight poverty?
A. The economic conditions are improving a little bit every year. To make one big step immediately and to solve all the problems of the country in one or two years is not realistic. If the Government is more specific in the development plan of some of its key economic sectors, and if much more energy will go into this direction, it will definitely contribute to the creation of more jobs. In the end it will contribute to a reduction of poverty.
Q. What are the main internal and external risks for Georgia?
A. The main challenges for the country internally are: to define the right policy for the economy; more support for some sectors; and to maintain a democratic political atmosphere, which also means that during the upcoming elections the processes should be as democratic as they have been previously. The Government should become more active especially towards business topics. Working on the next generation of reforms is also important.
As for external factors, the country should continue its integration with Western structures, the EU and NATO. And Georgia should contribute to a peaceful development, especially with its neighbours.