2021 December-January Analysis

Strong 2021 exports surprise many, lead economic growth higher in Georgia

Against the dire news background of extreme weather, the ongoing pandemic, declining FDI inflows and both domestic and neighbourhood unrest, Georgia’s recent export-and-tourism-led rebound in economic activity has been received with international institutional comments ranging from “surprising” (World Bank) to “remarkable” (European Investment Bank) and “impressive” (International Monetary Fund).

The gains have inspired upgraded forecasts of around 8% economic growth this year and 6% for 2022. The question now remains whether the economies of Georgia’s main export markets – China, Russia, Azerbaijan, Ukraine, Turkey and the EU – will support further strong growth. Georgia’s exports surged by 32% YoY to $411 million in October, while growth compared to pre-pandemic October 2019 was equally impressive at 29%, according to figures from Georgia’s statistics office Geostat. In the first 10 months of 2021, the value of the country’s exports rose by 24.9% YoY (to $3.39 billion) and by 11% compared to 2019.

In fact, as TBC Group’s chief economist Otar Nadaraia points out, “The performance of exports, especially without re-exports which never fell in 2020 in USD terms, is certainly to be noted. The main reason behind this is the fact that Georgia produces very few, if any, capital goods – demand for which has been subdued during the pandemic.” So, Georgia’s success over the last year has been a mixed blessing.

“Looking at Georgia’s export performance, a key question is how to take advantage of global markets and expand exports”, says Georgian investment bank Galt & Taggart’s head of research Eva Bochorishvili.

Bochorishvili notes that there are three crucial areas of potential development for the country’s export market. “First, trade-enhancing reforms to be implemented under the EU DCFTA can be particularly important for producing high quality products and increasing Georgian exports.”

It is also vital that Georgia “attract FDIs in export generating sectors,” says Bochorishvili, to overcome the “lack of capital and knowledge [needed] to produce and export more sophisticated commodities.” She emphasizes that this is only possible if the economy remains competitive and the business environment continues to improve.

Georgia’s human capital is another area in need of attention if the country wants to become competitive in the global market, according to Bochorishvili: “Georgia needs to align its education policy with economic strategy in order to supply the economy with necessary skills in the medium to long term.”

Detailed data published by Geostat shows that even if the largest elements in the January-October export totals were copper ores and ferro alloys (at $656 million and $378 million respectively), which rose partially on higher prices, other industries, especially food processing and light industries, have been gaining, too. The export of wine and fresh grapes rose by 16% YoY to $189 million, exports of hazelnuts by 32% to $90 million, and exports of t-shirts were up 2% at $54 million.

Commenting on the latest figures, the IMF observes that “with these indicators, Georgia will have one of the highest growth rates in the region of the Middle East and Central Asia.” Indeed, the figures for neighbouring countries raise concerns over the strength of their economic drivers to generate a continuing boom next year in Georgia’s export growth. Less promising, as the Germany-based Heinrich Boll Stiftung foundation underlined in a report on Georgia for the EU, is the structure of Georgia’s exports, which has not changed since its independence. For years now, the major concentration has continued to be in copper ores and concentrates, ferro-alloys, transit trade in used cars, wine, spirits and mineral waters. Thus, only too aware that the bulk of Georgia’s exports are raw materials (with no attendant benefits from value-added pricing or job-creation), the Georgian government has been promoting the development of export goods production.

Exploring the challenges faced by Georgia, a recent EIB and EBRD analytical report comments there is “significant space to grow further.” However, it is problematic that “Georgia remains one of the economies in the EBRD region that is the least integrated in global production chains, meaning that it provides input for the exports of other countries…”

Reasons for this include “a low level of digital transformation”, which “constrains innovative companies”, as well as a lack of e-commerce legislation. The EU’s Association Agreement and the Deep and Comprehensive Free Trade Agreement “present a significant opportunity that is yet to be fully utilised”, but as yet the alignment process is far from completed and costs incurred by businesses to comply with new regulations “is high”. Despite the trade agreements, trade with the EU has actually been declining, “reflecting the movements in the lower-value goods such as ore and minerals, fertilisers and manganese.”

Nor, comments the report, does Georgia have high skill levels, modern production sites, or established networks in the EU. EU standards and levels of regulation are steep compared to the Georgian experience and tastes different. For agriculture, the major problems are a “lack of scale … certification costs ..finance for greenfield business..and a lack of qualified people”, all of which make it hard to supply “shelf ready” products.

However, this EIB-EBRD report sees room for optimism as “categories of higher value added such as food, water, wine, spirits, wooden and paper products and apparel have significantly increased” and “there are indications that the composition of trade is changing”. Barriers are being tackled, such as lack of e-commerce legislation, as Natia Bantsuri, chief economist at the Business Association of Georgia describes: “Proper legislation is in the process of developing and various trade-related processes are being digitalized step-by-step. So, we hope to see progress in the near future.”

Nor is business standing idly by, she adds: “sometimes business is the one initiating and supporting new regulations (despite the associated costs), as BAG members (and not only our members) prefer to work in terms of a fair competition and regulations compatible with up-to-date international standards.”

Economic forecasts of Georgia’s major trade partners

In addition to domestic developmental issues that must be addressed to boost Georgia’s competitiveness in the world market, the state of its main trade partners’ economies will make or break its success this year.

China – Georgia’s No.1 export market at $520 million in the first ten months of 2021

Copper and precious metal ores ($462 million in total) make up the largest portion of Georgian exports to China, followed far behind by medical instruments and wine.

China’s economy will grow more slowly than initially expected this year owing to a “stronger-than-anticipated” pullback in public spending, according to the IMF, which has also warned that a weakening property market could bring a further blow. The IMF’s 8% growth forecast in the latest World Economic Outlook report for 2021 is down 0.1% from its July estimate as analysts warn China is facing a painful fallout from real estate weakness and surging coal prices and shortages. However, that figure is still China’s strongest growth rate since 2011, and it is noble that the world’s second-largest economy was the only major one to expand last year.

The IMF has lowered its Chinese growth outlook for next year to 5.6%. Concerns over China have intensified in recent weeks as government curbs on the property market piled pressure on overleveraged developers. Measures by local governments to meet short-term climate targets also led to energy crises. Currently, financial markets are more pessimistic than the IMF, with major U.S. bank JPMorgan saying that it expected full-year 2021 growth of 7.8% and 4.7% in 2022.

Russia – No. 2 export market at $482m through October ‘21

The main export products from Georgia to Russia consist of ferro-alloys ($134 million) and wine ($106 million). Importantly for rural Georgian jobs, although the numbers may be small, is the purchase of seasonal fruits, which has totalled $27 million so far this year. Economic growth in Russia is forecast to strengthen, but U.S. sanctions, a poor vaccination rate, and the central bank’s monetary tightening will all weigh on the outlook, the World Bank says. It now expects Russia’s economy to grow by 4.3% in 2021 and 2.8% in 2022. After shrinking by 3% in 2020, its sharpest contraction in 11 years, the Russian economy has recovered to pre-pandemic levels but is expected to lose momentum in the next few years without extra investment from state spending, the WB forecasts. This year, the economy “is supported by an earlier rebound in domestic demand and elevated energy prices,” the WB said in a report on Europe and Central Asia.

Azerbaijan – No. 3 export market at $365 million in the first ten months of 2021

Estimates range from the IMF’s forecast of growth of 3% in 2021 and 2.3% in 2021 to the EBRD’s more recent 4.0% for 2021 and 3.2% for 2022. The recovery has been strengthening more than expected on the back of rising oil and gas prices. GDP growth accelerated to 4.8% YoY in January to September 2021, mainly driven by non-oil sector growth of 6.2%. However, oil production is rising only gradually, in line with Azerbaijan’s commitments to the OPEC+, it notes. Therefore, oil and gas GDP growth remained moderate at 1.4%.

Turkey – No. 4 export market at $260 million

Georgian exports to Turkey this year consisted of $53 million of t-shirts and $42 million of men’s and boys’ clothing, made largely by Turkish companies in Georgia on an outsourced basis. The market was also made up of $42 million in ferro-alloys and $27 million in ferrous waste and scrap.

The economy will grow by 9% this year, says the European Bank for Reconstruction and Development (EBRD), as it is buoyed by a revival in exports and tourism. However, it adds that the central bank’s “confusing” policy approach and high inflation could yet harm the recovery, The EBRD also notes that it expects Turkey’s economy to settle near potential growth of 3.5% next year driven by exports, though it added rising energy prices and premature interest rate cuts pose risks. The IMF currently forecasts growth of 9% in 2021 and 3.3% in 2022.

The EBRD had forecast in June that Turkey’s economy would grow by 5.5% in 2021 but raised its estimate amid strong domestic demand and exports as well as the reopening of the crucial tourism sector. The central bank has slashed its key interest rate despite high inflation, unnerving investors and sending the lira currency to record lows. Annual inflation rose to 19.9% in October, leaving real rates deeply negative.

Ukraine – No. 5 at $192 million

The economic recovery is likely to gain momentum over the remainder of 2021, says the EBRD in its latest forecast, out early in November. The development bank sees the country’s growth increasing to 3.5% YoY in both 2021 and 2022. Growth in 2021 will be fueled by “a rich grain harvest and the continued normalisation of business activities, though slow progress on reform and rollout of the COVID-19 vaccination remain major risks to the forecast,” it told journalists at a press conference.

Armenia – No. 6 at $151 million

The IMF expects recovery to continue, with GDP growth of 5.5% and 5.25% in 2021 and 2022, respectively. While growth could accelerate next year on the back of strong reforms, it states in its recent report, the downside risks are also elevated. These risks include the ongoing fourth wave of COVID-19 infections, geopolitical tensions and a slowdown in external demand.

European Union

While the EU as a bloc is important (22% of exports in 2020, 16% so far this year), Bulgaria is the only single country market of any size. EU concerns about the development of Georgia’s exports lie behind the significant role that it plays in investment and provision of grants, says the Heinrich Boll Foundation.

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