Elections Affect FDI Inflow
20 September, 2012

The preliminary data of total inflow of Foreign Direct Investments (FDIs) in Georgia in the second quarter of 2012 equals USD 219 million that makes 7% growth compared to the similar statistics of 2011 but lags by 18% behind USD 269 million data with which the country entered the first quarter of this year. Experts presume the upcoming parliamentary elections may affect the FDIs inflow further as investors are waiting for the election results to make decisions.   

According to the

official statistics released on September 11, 2012, the preliminary figures of the second quarter of this year make 88% of the confirmed FDIs figure of the reported period in 2011. The preliminary statistics of the FDIs inflow in the first half of 2012 makes USD 488 million that translates into 29% and 7% of growth compared to preliminary and proved statistics of 2011 respectively. The bad thing is that the second quarter data lags behind the first quarter statistics by USD 50 million or 18%.

As a matter of fact the traditional FDIs trend is that it increases from quarter to quarter and the following quarter data exceeds the previous one normally. This trend was actually kept within 2010-2011 and if the factor of the upcoming elections scheduled by October 1st, 2012 was ruled out Georgia might attract around USD 2 billion this year, Nodar Chichinadze, Head of Association of Young Businessmen and Financiers, elaborated in the interview to Georgian Journal. However the uncertainty of the pre-election period makes most investors think twice before investing in Georgia that affected the statistics, Irakli Lekvinadze, another economic analyst, presumes.

“Investors are wary especially now when this said parliamentary elections create so much expectations that there might be serious changes in the power balance. Not only new FDIs inflows are hurdled but local investors who already run businesses in the country have suspended all new projects until this elections are through, all expect the results,” Lekvinadze said.

He thinks the third quarter following the elections will be crucial from investments point of view depending on the election results. Lekvinadze does not rule out that FDIs may influx after elections but he expects dwindling investments this year.

“It will be good if we can hit the forecasted USD 1 billion this year, but that seems very unlikely to me, let’s see what happens,” Lekvinadze said.

Chichinadze thinks even if Georgia exceeds all expectations and attracts USD 2 billion this year it is not a sufficient figure to help Georgian economy and solve the unemployment problem.

“One job creation requires about USD 40-50 thousand and if we take into account that around 290 thousand people are unemployed in Georgia we need USD 15-17 billion totally to employ all these people. Therefore we need at average USD 3-4 billion per year to solve the unemployment problem,” he said.

He finds it positive that this year the processing industry took the third place among leading economic sectors attracting the FDIs.

The leader sector taking the biggest share in the FDIs traditionally is energy sector in the second quarter of 2012. Energy covers 34% of the total volume accounting for USD 75 million by preliminary data. Transport and communication is the runner up again by USD 58.9 million making 27% of the total FDIs volume, and reprocessing industry is the third by USD 42 million and 19%.

“That means that production gains forces,” Lekvinadze thinks.

The share of 9 biggest investor countries made 85% in the second quarter of 2012. Netherlands leads the list by 37%, the US is a runner up by 11%, and Azerbaijan is the top three by 10%. Virginia Islands showing traditionally among top ten investors of Georgia along with the Panama Islands and Cyprus disappeared from the map this time and the US came on.

“It does not mean any mystery that Virginia Islands as well as Cyprus where off-shore investors are active disappeared from the list of top investors of Georgia,  you know, maybe they expired their resources and other investors took bigger interest,” Chichinadze said.

“Netherlands is also a haunt for off-shore companies; we had significant capital outflows to Netherlands past year, may be because it was clearing some liabilities or because it is a transit country for investors in fact where the capital is accumulated and redistributed to other countries. Now the capital is inflowing from there in Georgia.  The US is a big investor country and it more-less changes position among top-investors. At any rate Panama and Virginia Islands do not show up as the leading investors lately.  As to Azerbaijan, it is traditionally among top investors in Georgia; in spite of the parliamentary elections, they are more self-confident toward our country, which is their regional partner in energy and transit projects; besides, investors from the post-Soviet countries are used to instability and uncertainty, so they feel much easier than the western investors,” Lekvinadze elaborates.