2010: GOVERNMENT PREDICTS HIGHER FDI, STRONGER ECONOMY

Investor.ge spoke with Finance Minister Kakha Baindurashvili about the outlook for 2010 and the government’s plans to stimulate growth.

Maia Edilashvili

Georgia is ready to emerge from the shadow of last year’s economic downturn, according to Finance Minister Kakha Baindurashvili. The government is forecasting two percent growth for 2010 – a welcome relief after 2009.

According to Baindurashvili, one of the key movers in the economy will be a surge of foreign direct investment (FDI). Investment dollars fed the county’s growth in 2007-2008, before collapsing in the face of war and the global financial crisis. FDI fell by 60.44% to $505.1 million in January-September, 2009, compared to the figure in 2008. 

Georgian Prime Minister Nika Gilauri predicted on December 31 that the total volume for 2009 FDI would be $700-800 million, and he expects that FDI will reach $1.2 billion in 2010. FDI inflow skyrocketed in 2007, when it reached $2.015 billion.

“We expect that Georgia’s key partners will come out of the crisis this year,” Baindurashvili told Investor.ge. “So, it is likely that inflow of foreign direct investment will boost and this will positively affect the economic development.”

While the government is confident investment will increase, the country’s budget deficit, however, remains a concern. According to Baindurashvili, the budget deficit in 2010 is down by 122 million lari, compared to the figure in 2009. This year the budget deficit to GDP ratio is 5.9%, a decline of 0.8% compared to 6.7% in 2009. He noted that the government is aware it will need to curb spending to reign in the deficit.

“Since 2010, revenues coming in as a result of the mid-term economic growth will not be used to increase expenditures, they will go [to finance] the deficit,” Baindurashvili explained.

He added that other types of financing - like treasury bills, budget-support foreign credits and long term, low interest investment loans – will also be tapped to fund the deficit. 

But, Baindurashvili noted that spending will increase in some sectors to combat the rising unemployment in the country.

Finance Minister Kakha Baindurashvili says the economic outlook for the country has improved and the government is targeting sectors that still need stimulus.

He stressed that the 2010 budget allows for increased spending in social, healthcare, education and road infrastructure; other sectors face budget cuts. “These areas will remain key drivers for the economic growth and poverty reduction in the mid-term perspective, while the spending in the administrative and defense fields will see major cutbacks,” he said. Another area of concern is the agriculture field: more than half of the population relies on farming or agriculture related business.

Justification for this cutback, according to Baindurashvili, is the end of the Irrigation System Rehabilitation program, which cost 12.8 million lari, as well as the completion of a one-time 23.8 million lari program which provided rural farmers with fertilizer. 

The government is also planning to stimulate other sectors that were particularly hard hit by the crisis.

According to official statistics, GDP declined by 5.5 percent during the first three quarters of 2009. The hardest hit was trade, with a 3.1 percent decline. Other industries, like construction and finance, are already rebounding from a low point in the final quarter of 2008.

The country’s banks, however, are not recovering as quickly. According to Baindurashvili, the government is planning new efforts to help banks rebound and increase their lending ability.

He said the government is trying, through a multitude of new initiatives, to help banks lend money in lari.

According to the National Bank of Georgias (NBG), in the wake of the crisis, lari denominated loans decreased, while the loan dollarization ratio posted a 12.5% increase from a year earlier, reaching 77.3% by June 2009.

For NBG’s analysts, this parameter is of special importance because the exposure to currency-induced credit risk considerably increases under high dollarization conditions.

One of the main programs is a new instrument to hedge foreign exchange risks.  “This new instrument will allow the Central Bank to insure that the whole bank sector can give loans in lari notwithstanding in which currency those funds had been drawn so that the exchange risks are eliminated.”

Another initiative by the government is a plan to reduce the capital adequacy ratio for banks to 1.5% from 1.75%, allowing banks more opportunities to give loans in lari. 

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