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DCFTA: Promising Growth — Grant Thornton’s international business report

Author: Nikoloz Akhalaia, analyst at Grant Thornton Georgia

In 2014 Georgia signed the long awaited association and trade liberalization agreements with the EU. The agreements provide an opportunity to the decrease trade deficit by increasing export capacity, as well as making Georgia more attractive for potential investors. Because of the particular importance of this subject, Grant Thornton’s International Business Survey covered the topic and tried to show expectations of the business sector connected to association agreement.

The recent survey shows that 70% of respondents expect positive and very positive impact on the economy from recent trade agreement, while 26% do not expect any change. At present Georgia has unilateral trade concessions from the EU. The DCFTA will abolish tariffs for almost all products. The agreement aims to establish more predictable legal and institutional environment, making Georgia more attractive to economic partnership. The skepticism of those who do not expect improvement of economy, is explained by the fact the all the processes require time, and while the agreement provides opportunities, making most of them is a test which country has yet to pass.

When asked about the impact that business representatives expect from trade liberalization on their companies, only 6% were not able to answer, 34% said that they do not expect any change, 44% and 16% foresee positive and very positive impact, respectively. Business owners express the same confidence about readiness to compete with European counterparts. 50% reported that their supply chain management and sustainability is ready in compliance with EU regulations, 4% stated that they will be ready within one year and 18% within two years and more. At the same time 28% said that they do not know how long it will take to adopt and implement necessary standards. The lack of confidence is backed up by the fact that companies need to implement quality standards and modern practices to able to keep up with the competition, which requires significant investment of both time and money. Georgia can offer natural and quality food products and European consumers tend to focus on these product characteristics. Nevertheless, it should be noted that the European market is very competitive. Local companies will need significant investment in marketing and product development to enter the EU market and be able to compete with long-established players. And while predicting success today is a long shot, the investment most likely will require a few years to break even, after which managers will start seeing profits.

The conflict between Russia and Ukraine has been among major events in 2014. Grant Thornton’s IBR survey covered the topic by asking the question “what impact has the conflict between Russia and Ukraine had on your business?” in Armenia, Estonia, Georgia, Latvia and Lithuania.

As Russia and Ukraine together are major players in the eastern European market, the ongoing conflict has played a negative part in the region’s development. 14.6% of survey participants expect significant reduction in orders within the region. The figure is slightly better compared to Latvia and Lithuania, where expectations for reductions are 18% and 24%, respectively, but it is significantly high compared to Estonia and Armenia, where only 6% have the same expectation. At the moment, 2% from Georgia and Lithuania report that all orders have been cancelled from the region, while Estonia and Latvia report 4%. 6% of respondents in Georgia also say importing of raw materials and goods from Russia or Ukraine has become more complicated, same as in Armenia and Latvia. The distribution of percentages was interesting for an answer about doing business in Russia or Ukraine. According to the survey, 20% of respondents from Armenia and Lithuania said that they do not do business in these countries. Estonia has the largest figure – 84%, followed by Latvia 36%, while Georgia has the lowest 8.3%. The expectation for rising energy prices is low, in Georgia and Latvia about 2% think energy costs might be higher against 6% in Armenia and Lithuania.

In 2014 Georgia has gained an opportunity to enter the market of 27 states with over 500 million high income consumers. To exploit such opportunity the country has yet to get rid of unpredictable and poorly implemented business decision making. In the other words, Georgia needs modernization and a focus on market development, consumer protection and product quality.