Chapter 1. The macroeconomic context for green investments in Georgia

This chapter briefly describes the macroeconomic and political context for green investments in Georgia with a focus on the investment climate. The general performance of the economy underpins the green finance needs and trends in the country. Throughout, seven figures examine trends over 2008-18. These include real gross domestic product growth rates, the GEL: USD exchange rate, the annual consumer inflation rate, the key monetary policy interest rate, gross fixed capital formation and foreign direct investment net inflows. It also includes Georgia’s country ranking in the “Doing Business” report over that decade. The chapter finishes with some thoughts on how general improvements in the investment climate could contribute to higher levels of green finance, particularly in the energy sector.

    

1.1. Political context

Georgia has witnessed significant economic and political instability over recent years. In 2008, the territories of Abkhazia and South Ossetia established de facto independence from Georgia. Tbilisi has sought to integrate with Western blocs such as the North Atlantic Treaty Organization (NATO) and the European Union (EU). However, Georgia's geographic distance from Europe and its exposure to the Russian Federation (hereafter “Russia”) has encouraged Tbilisi to seek supplementary partnerships with countries like Azerbaijan and Turkey.

Political rule has been broadly stable in Georgia. However, it must balance the often-competing challenges of democratic reform with the tendency towards consolidation of power by the ruling elites. In 2012, the Georgian Dream government came to power. It has won every subsequent election by a wide margin, defeating the United National Movement that governed between 2003-12.

In July 2016, the EU and Georgia Association Agreement (AA) (European Union, 2014[1]) provisionally applied the Deep and Comprehensive Free Trade Area (DCFTA)1 arrangement as a preferential trade regime between the two sides. The EU is the main trade partner of Georgia. In 2018, around 27% of Georgia’s trade took place with the EU, followed by Turkey (14%) and Russia (11%) (European Commission, 2019[2]).

1.2. Macroeconomic situation

Since the change of government in 2003, the country embarked on reforms to liberalise the economy. As a result, Georgia’s economy has been growing steadily in recent years. Despite a sharp contraction in gross domestic product (GDP) in 2009 (as a result of the global financial crisis), Georgia has more recently posted steady economic growth of between 3-6% per annum (see Figure 1.1).

The most important sectors of the economy are agriculture, tourism, mining (manganese and copper) and manufacturing. Due to strained relations with Russia, Georgia has invested in energy independence by focusing on hydropower. The country is also attempting to use its key geographical location to become a logistics hub for gas and oil pipelines.

Figure 1.1. Real GDP growth rates 2008-18, annual percentage

Source: (World Bank, 2019[3]).

The Georgian Lari (GEL) has been slowly depreciating against the US dollar (USD). The exchange rate stabilised between 2010-14, but has recently begun to depreciate further (see Figure 1.2).

Figure 1.2. GEL: USD Exchange rate, 2008-18

Source: (World Bank, 2019[3]).

The economy of Georgia has also benefited from relatively low interest rates from a regional perspective (see Figure 1.3), with a period of deflation in 2012-13.

Figure 1.3. Georgia annual consumer inflation, 2008-18, percentage

Source: (World Bank, 2019[3]).

Interest rates have been relatively low compared to other countries in the region over the same period. The key policy rate set by the National Bank of Georgia has fluctuated between 4-8%. This, in turn, has reduced the cost of borrowing in the real economy. High interest rates can reduce the capacity of borrowers to invest in energy efficiency and renewable energy (see Figure 1.4).

Figure 1.4. Georgia key monetary policy interest rate, 2008-18, percentage per annum

Source: (NBG, 2019[4]):

1.3. Macroeconomic situation

The investment climate in Georgia has been strengthened considerably over recent years. Significant anti-corruption efforts have mostly eradicated low-level bribery. Georgia ranks sixth in the 2018 World Bank “Doing Business” survey and is the highest placed country in the region. The government is focused on ensuring low deficit, inflation and a floating real exchange rate. However, attainment of these goals is affected by regional developments and other external factors. Public debt and deficits remain under control.

The 2014 medium-term economic strategy (“Georgia 2020”) promotes business friendly policies and commitment to a low-taxation economy and investment in human capital. It also stresses the potential for trade and infrastructure development.

In 2012, the United States and Georgia established a High-Level Dialogue on Trade and Investment to identify ways of increasing bilateral trade and investment. In June 2014, Georgia signed an AA and DCFTA with the European Union.

Figure 1.5. Georgia country ranking: “Doing Business” report 2008-18

Source: (World Bank, 2018[5]).

Gross fixed capital investment fell significantly in 2008-09. However, it returned to strong levels between 2016-18 at about 30% of GDP (see Figure 1.6).

Figure 1.6. Gross fixed capital formation, share of GDP, 2008-18

Source: (World Bank, 2019[3]).

Foreign direct investment (FDI) has also recovered to pre-financial crisis levels as a share of GDP. However, it dropped significantly in 2018 (see Figure 1.7).

Figure 1.7. Foreign direct investment net inflows as a share of GDP, 2008-18

Source: (World Bank, 2019[3]):

1.4. Forward outlook

The Georgian economy continues to recover on the back of GDP growth and rising consumer demand. GDP is expected to grow in 2019 and inflation is expected to remain stable. The integration of Georgia’s exports into the EU trade market is likely to increase the country’s attractiveness as an investment destination.

Improvement in the investment climate is likely to result in a significant enabling effect on environmental investment, particularly in the energy sector. Reforms could potentially include significant strengthening of investment policy and investor protection to attract FDI and multi-national entities, and energising public-private dialogue within Georgia. To encourage private sector investment, Georgia may consider promoting environmental and climate-change disclosure requirements for private sector companies in line with standards of the EU and the Organisation for Economic Co-operation and Development.

References

[2] European Commission (2019), “Countries and Regions, Georgia”, webpage (accessed 23 October 2019), https://ec.europa.eu/trade/policy/countries-and-regions/countries/georgia/.

[1] European Union (2014), “Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the One Part, and Georgia, of the Other Part”, Official Journal of the European Union L 261/7, Vol. 57/30 August, https://eeas.europa.eu/sites/eeas/files/association_agreement.pdf.

[4] NBG (2019), Financial Soundness Indicators, National Bank of Georgia, webpage (accessed 23 October 2019), https://www.nbg.gov.ge/index.php?m=304.

[3] World Bank (2019), World Development Indicators, (database) (accessed 23 September 2019), http://data.worldbank.org/products/wdi.

[5] World Bank (2018), Doing Business 2019: Reforming to Create Jobs, World Bank Group, Washington, DC, https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf.

Note

← 1. This agreement means both sides will mutually open their markets for goods and services based on predictable and enforceable trade rules. This is part of the broader Association Agreement whose political and co-operation components have been provisionally applied since November 2014.