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Georgia Sees Corporate Tax Reform Spurring FDI 7-8%, Considers IPOs

Georgia expects corporate tax reform to boost foreign direct investment by 7-8 per cent in 2017 and is considering selling two stakes in major state-owned firms, Finance Minister Dimitry Kumsishvili said in an interview with Reuters.

He said the moves should lift Georgia’s expanding economy, but said the government did not plan to raise cash by issuing Eurobonds.

Instead, Kumsishvili said it was considering initial public offerings (IPO) of 25 per cent stakes in the state Oil and Gas Corporation (GOGC) and the state railways monopoly. The former would be listed in London, the latter in Shanghai.

The ex-Soviet republic’s economy, which has suffered from falling exports and remittances and a plunge in the Russian rouble, expanded by 2.5 per cent in the first 10 months of the year, compared with the same period a year before, when growth was running at 2.8 per cent.

The country, which is crisscrossed by pipelines taking Caspian oil and gas from Azerbaijan to Europe, has cut its economic growth forecast for 2016 to 2.7 per cent from 3 percent but expects its economy to expand by 4 per cent next year.

“We expect to attract $1.63 billion [Dh5.98 billion]-$1.64 billion this year and we expect this indicator to rise by 7-8 per cent in 2017,” Kumsishvili, who is also a vice premier, said.

Foreign direct investment (FDI) in Georgia rose by 5 per cent in the first nine months of this year compared with the same period in 2015 to reach $1.298 billion, preliminary statistics office data showed earlier this month, with Azerbaijan the biggest investor and the transport and communications sectors the biggest beneficiaries.

Kumsishvili said that the existing liberal economic environment and planned tax reforms would drive foreign investment.

“When we talk to investors, they say that this reform will be a big benefit for them and a big advantage for Georgia,” the finance minister said.

Georgia will stop taxing corporate undistributed profits, reinvested or retained, from January 1, 2017 and plans to tax dividends instead.

The government estimates revenues from corporate profit tax will decline by 500 million lari ($187 million) next year and plans to cover this gap by revenues with increased excise levies on tobacco, cars and oil products as well as with taxes on gambling from January 1, 2017.

The IMF is sceptical about the corporate tax reform and projects that it might knock 1.5 per cent off Georgian GDP growth, leading to a wider fiscal deficit.

“We don’t think so … The increase in excise tax will offset losses and about 500 million lari will remain in the economy,” Kumsishvili said.

“As for the fiscal deficit, it will be down to 4.1 per cent next year from 4.4 per cent expected in 2016.” He said that the next year’s fiscal deficit was to be covered by external and internal borrowing as well as by proceeds from privatisations.

Kumsishvili said that the government was considering launching IPOs on foreign stock exchanges for the state-owned energy corporation, GOGC, and for Georgia’s Railway.

“We will do it when market conditions will be appropriate for the placement … It may be in one year or even in a year and a half,” he said.

The GOGC, which operates the North-South gas pipeline transporting gas from Russia to Armenia via Georgia, issued $250 million of its first five-year Eurobonds in 2012 and the same amount again in April 2016. Goldman Sachs and J.P. Morgan acted as lead managers.

Georgia’s state railways monopoly, which is involved in developing new routes such as the Baku-Tbilisi-Kars project providing a corridor from the Caspian Sea through Azerbaijan and Georgia to Turkey, postponed a planned London listing in 2012 due to volatile markets.