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Downturn in FDI – A Warning to Investors?

According to preliminary indicators by Geostat, the national statistics service of Georgia, foreign direct investments (FDI) in the first quarter of 2018 were 279.3 million USD, down 32.9% compared to preliminary indicators from the first quarter of 2017.

According to Geostat, the downturn emerged after several enterprises changed ownership to Georgian residents and the liabilities for nonresident direct investors (the coverage of loan debt) declined.

“If we consider FDI statistics due to economic sectors, a major downturn was recorded in the transport sector,” Deputy Economy Minister Ekaterine Mikabadze said.

Besides the downturn in the transport sector, the 32.9% decrease in FDI is related to the completion of a gas pipeline project, she added.

“The facts clearly show that BP is finishing the gas pipeline construction project, and for this reason a downturn was expected in 2018. Completion of this large-scale project has shrunk the inflow of foreign investments into this sector,” Mikabadze said.

Unlike government representatives, doctor of economics Soso Archvadze asserted that this decrease signifies a warning for foreign investors.

“When foreign investments shrink, this may be a yellow warning for other investors. They will show more restraint making investments in Georgia,” Archvadze said.

As for the statistic itself, over the past 16 quarters (or four years), this indicator is the second lowest, after the numbers from the second quarter of 2014. Naturally, this gives cause for certain considerations and discussions, Archvadze noted.

“A key reason is that owners were replaced and the capital invested by foreign investors has moved to the ownership of domestic residents,” he said.

Doctor of economics Rati Abuladze said that United Kingdom is leader in terms of investment in Georgia (82.7 million USD); Azerbaijan is second with 51 million USD; China is third with 41.6 million USD; the Netherlands is fourth with 32.3 million USD; and the USA is fifth with 23.8 million USD. Luxembourg has invested 18.6 million USD and investments from Panama totaled 16.9 million USD.

The finance sector is the most attractive sector in terms of investment, with 110.6 million USD, the development sector is second with 69.1 million USD and the processing industry is third, with 40.2 million USD of investments. Investor’s interest has declined in the agricultural and communications sectors, Abuladze said.

According to his information, the FDI inflows to Georgia recorded in the first quarter of 2018 are the lowest in seven years. “I agree with the Geostat appraisal, which asserts that FDI inflows declined after several enterprises moved to the ownership of Georgian residents and liabilities before nonresident direct investors shrank. However, I confirm that attracting foreign direct investments remains a serious challenge for the authorities because of political and economic conflicts in the country, Abuladze said.

The doctor of economics noted that the reduction in FDI inflows has a direct relationship to:

  • Economic policy of the country – Reduction in FDI inflows is a signal that the confidence and interest of foreign investors has declined. It reflects inefficient approaches in existing economic policy and lack of economic viability (in distinct fields);
  • Attractiveness of economic sectors – executive bodies fail to ensure efficient promotion of investment in economic sectors, timely ends to projects and delay the reformation process. For example, in places where the communication sector and internet are well developed, the market is profitable and attracts investment. In Georgia, where the internetization process was not finished, the country loses considerable revenue;
  • Number of privatized facilities – reduction in the number of facilities, which are attractive in terms of investments;
  • Social and economic condition of population – the middle class is small in Georgia, and the majority of people earn low incomes or have debt. Investors see a small market with low solvency and weak effects from economic programs;
  • Geopolitical risks, political uncertainty;
  • Scales of economic diplomacy;

On the whole, I note that the country has important potential. To improve the economic viability of the country, foreign and domestic investment activity should grow. However, this objective is hindered by staff policy and a system that stifles staff.

In Georgia, the most successful policy is the policy of stifling public and academic active resources. This is a technology for maintaining and igniting old power. This policy maintains in the country:

  • Floating and instable political and economic contrast;
  • Deficit of staff, where the old political space determines the potential;
  • Shaping and control of governance and political opinion (similar situation has created a “governance buffer”).

“In general, the policy of stifling staff does not have a positive influence on European and EuroAtlantic cooperation, employment of investment potential or attracting of foreign investors. This obsolete policy makes human resources flee to foreign countries, a process that damages the social and economic conditions of our society.

And finally, the country is capable of shaping a new political environment, which thanks to state programs and new political technology, will ensure a growth in foreign investments, attract new investments and increase domestic investments. Therefore, new political resources and charismatic energy will drive a growth in the Georgian economy and enliven our society,” Abuladze said.

Shota Buchukuri, head of the Caucasus Economic Research Institute, stated that in the first quarter of 2018 FDI inflows to Georgia totaled 279.3 million USD, and this is not a favorable number compared to previous years. Despite explanations by Geostat, fixed indicators draw attention anyway and they require more initiatives and work from the government.

It is noteworthy that FDI inflows recorded in the first quarter of 2018 are lower by 32% compared to the indicators from the first period of 2017, and are the lowest since 2011.

According to information from Buchukuri, since poverty and unemployment are key challenges, reduction in investments cannot have a positive influence on economic growth and the resolution of these problems.

It is noteworthy that investments from Azerbaijan and Turkey, two leading economic partners, have been declined considerably, while Russian investment has doubled.

“As for specific sectors, the most evident declination was recorded in the areas of transport, communications and real estate. Over the past 10 years, the majority of investments were made in the sectors of transport and communications, and this declination should be real signal. The problem is that a major part of investments are registered in the capital city, and consequently, the main economic activity occurs in Tbilisi, while in regions the situation has not improved. In this situation, those measures that the authorities carry out are not sufficient, and it is necessary that the authorities direct more effort to attracting international investors to ensure the stability of the Lari exchange rate and the high economic growth of the country,” Buchukuri said.