Issue 6, 2015. December-January

   

FDI - the Face of an Economy

A look at Georgia's FDI based on sector

Foreign direct investment (FDI) in 2014 was $1.75 billion, up from 2013's $941.9 million. Slightly over 50 percent of total FDI in 2014 was in construction, restaurants, transportation and infrastructure.

Investments from China, as well as an uptick in investment from post-Soviet countries, were responsible for the 2014 increase.

FDI in Georgia in the first half of 2015 was $530 million, according to preliminary government data.

Increased Trade from Post-Soviet Countries

FDI from post-Soviet countries increased by $350 million in 2014. Azerbaijan led, with investments extension of the South-Caucasus pipeline, Baku-Tbilisi-Kars Project and SOCAR Energy Georgia, as well as other projects. Russian investment increased from $2 million in 2013 to $82 million in 2014, according to official statistics.

Continued Investment from China

During the first nine months of 2014, China's Hualing Group was the biggest investor in the country, putting a total of $200 million in its Georgian projects over the course of the year. Hualing Group, a global company worth $3 billion, has implemented several projects in Georgia: a wood processing facility licensed for 20 years, a Free Industrial Zone project, a stone quarry license, and is a 90% shareholder of Basis Bank and Tbilisi Sea New City.

Investments Down in Energy Sector

Investment in energy dropped in 2014, compared to the previous year: FDI was at $189.9 million in 2014, down from $244.7 million in 2013.

The energy sector remains attractive for investors, despite the dip in investment, due to high domestic and regional demand, coupled with the deregulated energy market and competitive rates. The World Bank noted "Georgia has a developed, stable and reliable energy sector...The most promising source of additional energy generation is hydropower and the government is focused on securing private investments for construction of new hydropower stations. Currently, only 12 % of Georgia's hydropower potential is being utilized." There are 15 hydropower plants under construction, with eight expected to be completed in 2015-2017, according to the Georgian National Investment Agency.


Looking Ahead

FDI in the financial sector amounted to 115 million USD in 2014. Return on Equity (ROI) of Georgian commercial banks was 6.2 percent in the second quarter of 2015. Current trends suggest that investing in the financial sector is profitable, and yields are increasing because interest rates are up (NBG increased its refinancing rate by 3.5%, compared with the beginning of 2015). In contrast with the increase in interest rates, non-performing loans to total portfolio of loans decreased to 3 percent.

FDI growth in real property this year accounts for only $9.6 million USD, compared to last year's $96 million - which was largely due to building for the Youth Olympic Games.

The drop in investment can be partially explained by limited demand due to the Georgian lari's 37 percent depreciation against the U.S. dollar, which has cut into consumers' purchasing power and made dollar-based mortgages more expensive.

Tourism investment is also on the radar for 2015 and beyond, according to the World Bank, which noted there were 5 million visitors to Georgia in 2013 and 6.3 million are expected by the end of 2015.

The Georgian Ministry of Finance released its projections of a budget orientated on social spending for 2016, whichis also a weak signal for investors. Economic growth is expected to be around 2 or 3 percent, which is low for a developing country like Georgia. Due to the strong link between economic growth and FDI, the likelihood of a significant increase in capital inflow is low for 2016.