Georgia has made outstanding progress in building institutions, eliminating corruption and strengthening public finances. Notably, these genuine economic and structural improvements have been institutionalized. The results are reflected in international rankings: 15th out of 189 countries in the World Bank’s 2015 Ease of Doing Business, 22nd out of 178 in the Heritage Foundation’s 2015 Index of Economic Freedom, 11th out of 197 in the Trace International’s 2014 Matrix of Business Bribery Risk. Only 4% of people – less than in the UK and the US – admitted to paying a bribe according to Transparency International’s latest Global Corruption Barometer.
On the fiscal side, Georgia’s Economic Liberty Act ensures a prudent approach by capping consolidated government spending at 30% of GDP, the fiscal deficit at 3% of GDP, and public debt at 60% of GDP. In addition, any new taxes or tax hikes require national approval through a referendum.
Georgia underscored its commitment to European values by securing a democratic transfer of political power in successive parliamentary, presidential, and local elections and by signing an Association Agreement and free trade agreement with the EU. The deal sets a roadmap for harmonizing economic policy with European standards, aimed at simplifying Georgia’s access to the EU market, a common customs zone of c.500mn customers and a US$ 18.5tn economy. While remaining committed to European values, Georgia has also managed to stabilize relations with Russia.
An influx of foreign investors on the back of the economic reforms has boosted productivity and accelerated growth. On the downside, the massive FDI and other capital inflows supported capital goods imports growth. On the upside, FDI inflows boosted productivity – according to the World Bank, productivity gains accounted for 66% of the average 5.6% growth over 1999-2012. Despite the gains, low relative levels of productivity suggest further potential.
Impressive GDP growth: average 6.3% annually from 2003 to 2014 (13.8% CAGR in US$ nominal terms). A diversified growth structure, with the two largest sectors (trade and industry) accounting for just 35% of GDP in 2014, affords economic flexibility in the face of headwinds. The achievements are even more remarkable given the multiple hurdles Georgia has faced – domestic and global crises, the conflict with Russia in 2008, and recent regional economic uncertainties.
A natural transport and logistics hub, connecting important regions and a market of 900mn customers without customs duties. Georgia’s strategic location – between land-locked energy-rich countries in the east and European markets in the west – creates and supports huge potential in transport, logistics, and tourism. Favourable trade regimes are established through free trade agreements with the EU, CIS, and Turkey and GSP with USA, Canada, Japan, Norway, and Switzerland. Continued spending on roads, railways, energy, tourism, and municipal infrastructure will further improve Georgia’s role as a transit hub.
Electricity transit hub potential through increased generation and transmission capacity. Currently, only an estimated 20% of Georgia’s hydro potential is utilized. Hydropower generation has been expanding in recent years, with an additional 146MW of installed capacity commissioned in 2014 and an estimated 496MW in the pipeline to be commissioned over the next 5 years. Expanding generation is supported by augmentation of transmission capacity. As per government’s 10-year transmission development plan, an additional 5,000MW of transmission capacity will be added to the grid in the coming decade, facilitating domestic electricity trade, as well as cross-border trade and energy swaps to Eastern Europe.
A real opportunity to establish itself as a regional service hub. Services have played a dominant role in driving growth, accounting for 66% of the economy in 2014 (up from 42% in 1996) and 43% of total employment. Georgia is already an established, attractive tourist destination: the number of visitors increased at a 29% CAGR over 2005-2014, generating US$ 1.8bn revenue in 2014. Georgia boasts a sound financial sector with the country’s two leading banks being the only companies from the Caucasus region listed on the LSE. Strong governance and sound policies have made Georgia attractive in the eyes of foreign investors. With a strong financial sector, modern institutions, and a government committed to supporting market-based growth, there are clear opportunities to position Georgia as a service hub for European, Asian, and Caucasian regional headquarters, a business process outsourcing provider, and a regional centre for healthcare as well as for other labour-intensive services relying on Georgia’s low-cost and qualified workforce.
Georgia has the potential for future productive capacity gains by making better use of its labor resources. DCFTA implementation and continued strong FDI inflows will further affect productivity improvements, as workers will move from agriculture to more productive, export-generating services sectors. While we do expect appreciation of the lari in the medium term, we do not view it as a threat to competitiveness given the expected growth in productivity levels.
We see Georgia’s potential to grow 5% annually, on average, over the next decade. With the necessary institutions largely in place, favourable geographic location and well-developed air, land, and sea transport networks, and Georgia’s real potential to transform itself as a regional service hub, Georgia is poised to generate 5% annual average real growth over the next decade, based on IMF’s 5-year growth forecast.
