Issue 1, 2015. February-March

   

DCFTA: PROMISING GROWTH INSIGHTS FROM GRANT THORNTON'S INTERNATIONAL BUSINESS REPORT

In 2014 Georgia gained the opportunity to enter a market of 27 states with over 500 million high-income consumers. To exploit this opportunity, the country must modernize from its unpredictable and poorly implemented business decision-making and focus on market development, consumer protection and product quality, a recent survey by Grant Thornton found.

Nikoloz Akhalaia (Grant Thornton)

In 2014 Georgia signed the long awaited association and trade-liberalization agreements with the EU, known as the Deep and Comprehensive Free Trade Agreement (DCFTA). These agreements provide Georgia the opportunity to the decrease its trade deficit by increasing export capacity, and they make Georgia more attractive for potential investors as well. Due to the importance of the association agreement,Grant Thornton's International Business Survey used a recent survey to explore business expectations from the DCFTA.

Overall, businesses positive about EU opportunities

The survey of 50 business respondents, conducted in the fourth quarter of 2014, shows that 70% of respondents expect positive or very positive impacts on the economy from the recent trade agreement, while 26 percent do not expect any change.At present, Georgia has unilateral trade concessions from the EU that removed customs duties for some exported goods. The DCFTA will abolish tariffs for almost all products, which means that the country will enjoy zero customs tariffs. The agreement aims to establish a more predictable legal and institutional environment, making Georgia more attractive to economic partnership. The skepticism of those who do not expect improvement of economycan be explained by the fact the all the necessary processes require time, and while the agreement provides opportunities, making the most of them is a test which the country has yet to pass.

When asked about the impact that business representatives expect from trade liberalization, only 6% were not able to answer; 34% said that they did not expect any change and 44% and 16% foresaw positive and very positive impacts, respectively.Business owners express the same confidence about readiness to compete with European counterparts.

50% reported that their supply-chain management and sustainability are already incompliance with EU regulations, 4% stated that they will be ready within one year, 12% within 2 years, and 4%, within three or more years, respectively. At the same time 28% said that they do not know how long it will take to adopt and implement necessary standards.

Concern over competition

Businesses' lack of confidence is backed up by the fact that companies need to implement quality standards and modern practices to be able to keep up with the competition, which requires significant investment of both time and money. Georgia can offer natural and quality food products and European consumers tend to focus on these product characteristics.Nevertheless, it should be noted that the European market is very competitive. Local companies will need significant investment in marketing and product development to enter the EU market and to be able to compete with long-established players. And while predicting success today is a long shot, the investment most likely will require a few years to breakeven, after which managers will start seeing profits.

The role of the Russia-Ukraine conflict

Together, Russia and Ukraine are major players in the eastern European market andthe ongoing conflict has played a negative part in the region's development. In response to Grant Thornton's IBR survey question "What impact has the conflict between Russia and Ukraine had on your business?" 14.6% of respondents in Georgia said they expect a significant reduction in orders within the region. The figure is slightly better compared to Latviaand Lithuania,where expectations of reductions in orders are 18% and 24%, respectively, butit is significantly higher compared to Estonia and Armenia, where only 6% have the same expectation. At the moment, 2% from Georgia and Lithuania report that all orders have been cancelled from the region, while Estonia and Latvia report 4%. 6% of respondents in Georgia also say importing of raw materials and goods from Russia or Ukraine has become more complicated, the same as in Armenia and Latvia. The distribution of percentages was interesting for an answer about doing business in Russia or Ukraine. According to the survey,20% of respondents from Armenia and Lithuania said that they do not do business in these countries. Estonia has the largest figure - 84%, followed by Latvia 36%, while Georgia has the lowest 8.3%.The expectation for rising energy prices is low,inGeorgia and Latvia about 2% think energy costs might be higher, against 6% in Armenia and Lithuania.

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