TBC Research: FDIs down, but external balance reasonably strong

Foreign direct investment (FDI) inflows to Georgia totaled $187 million in the second quarter of 2019, down by 53.7% compared to the same period of the previous year. According to official statistics, the decline has affected several sectors, including energy (minus 37%), construction (minus 91%), transport and communications (minus 73%) and other fields.

TBC Research has released a new review of these statistics. The organization notes that the decline was higher than projected, and in some areas, particularly the decline in FDI in the non-bank financial sector followed the introduction of a responsible lending system.

“The decline in FDI in the financial, especially in non-banking and real estate sectors is likely to be due to toughening of credit and building permit regulations. Although the decline in FDI in the construction sector is viewed as a negative event, the decline in investment, which is mainly attributable to non-bank consumer lending institutions, should be seen as a necessary component of the introduction of a responsible lending system.”-says the research.

As review claims, Georgia’s potential growth rate is around 5%. “Despite the reduction of FDIs, the level of the gross capital formation remains strong supported by higher domestic savings and strong business lending. Also, the shift of public expenditure towards capital spending keeps the investments strong. From the trend growth perspective, even with FDI inflows at 5-6% of GDP, we still think Georgia’s potential growth rate is around 5%.” – says in the document.

According to TBC Research, one of the reasons for this was the introduction of a 50% interest rate on loans, which, as they assess, was a step in the positive direction. The research group also predicts in the review that FDI in the construction sector is likely to increase, due to the strength of the sector.

TBC Research notes that FDI accounted for 4.7% of Georgia's GDP in this period. The organization estimates that the FDI reduction in annual terms would be about 30%.

According to the National Statistics Office of Georgia, the reason for the decrease in investments is the completion of the construction of the main gas pipeline. Geostat also says that another reason for the decline is the reduction in obligations to non-resident direct investors and the decrease in the volume of reinvestments.

TBC Researchers also discuss the chances of an estimated drop of inflows in July, revised upwards since the decline of FDIs in Q2 2019 was fully offset by the improved balance of trade in goods and per visitor spending in Q2 2019 YoY has risen as well. These factors, taken together with the continued growth of remittances and favorable financing conditions internationally, enables researchers to argue that the external balance is reasonably strong. Therefore, also taking into account strong inflation pressures, the review says that the GEL is “heavily undervalued.”