Before the war in Georgia this August, Geoconcentrates, a local fruit juice company, was planning to open three new plants in Gori, a region famous for its orchards. But when the company employees finally returned to Gorijvari – a village where, a few weeks earlier, they had begun building their new factory – all they found was a burnt-out shell, looted and destroyed.
“It’s the same for the village of Pkhvenisi, where we have a plant in which we have already invested GeL200,000 (more than $140,000); we have been unable to enter it, as it is still out of the control of the Georgian authorities,” Ivane Goglidze, an official at the juice firm, tells Emerging Markets.
A similar tale is told elsewhere of direct and indirect damage to industrial plants, businesses and commerce. Elite Electronics, for example, is one of the largest distributors of electric appliances in Georgia. The firm reckons direct damage will cost the dollar equivalent of $390,000, indirect damage was around $2 million and sales have fallen by some two-thirds.
Under president Mikheil Saakashvili, the economy was booming. But now Georgia faces a heavy repair bill. According to a World Bank report, Georgia will need at least $3 billion of international aid in the coming three years to bolster the economy until capital flows recover. And despite swift promises of international aid, there are questions over whether funds will be enough to cover rising costs.
Delegations from the US, the World Bank and the IMF have visited Georgia to assess the extent of the damage caused by the fighting. A special group of donors, representing the Asian Development Bank, EBRD, European Commission, European Investment Bank and World Bank are also operating in the country.
Underestimates
Government officials say they are still assessing the damage, but experts warn that official figures given so far are too low. In August, Lado Gurgenidze, the prime minister, made an initial statement on the actual damages as being $1 billion. The government later said this was a provisional assessment.
According to the defence ministry, the direct damage inflicted on the military was the dollar equivalent of $143 million; provision of accommodation for internally displaced people would amount to $115 million in 2008. At the same time, according to the finance minister, the budget deficit from lost tax income would hit GeL270 million ($193 million) in 2008.
Deputy finance minister Papuna Petriashvili tells Emerging Markets that “despite the military operations, GeL326.3 million was mobilized within the state budget in August. These resources include GeL303.6 million as a result of tax incomes. Hopefully, the efficient work of financial agencies and the support of international and donor organizations will enable us to carry out unimpeded funding of all budgetary priorities in the future.”
Former prime minister Zurab Noghaideli says the government is not confronting the reality of a potentially devastating budget deficit. “According to some calculations, the budget of Georgia will have lost around GeL500 million by the end of the year, which is far more than the $250 million assistance expected to come in from the US this year,” says Noghaideli.
“What is also unavoidable is a loss of 60,000-70,000 jobs in the property and construction sector. A lot of other sectors are linked to construction, which means the crisis is only going to deepen further. We need to take urgent measures, but the government does not even want to talk about the problems.”
Former finance minister Lekso Aleksishvili says the entire outstanding debt due to the property sector totals around GeL1.5 billion. The sums already paid by customers cover approx. 52% of these liabilities; the outstanding debts to be paid to banks constitute 32%. And about a quarter of construction has not yet begun. Aleksishvili reckons that contagion from the property and construction business will spill over to other parts of the economy.
Bank beating
The country’s banking sector has been hard hit too – and at a time of acute global financial turmoil. Immediately after the war began, the central bank imposed restrictions on commercial banks, curbing their ability to give credit and requiring them to have special permission to release deposits worth more than $50,000.
The Bank of Georgia has probably been hit the hardest. It is quoted on the London Stock Exchange. Before military operations began, its share price was $45; it is now under $10. Around 10% of its deposit base was lost during the conflict.
Other banks have faced similar problems. A TBC-Bank spokesperson says deposits had started returning to the bank, but they were only giving out small loans. “Today, credit is being provided mostly to people who had their applications confirmed before the war and to our big regular clients,” she says. “We haven’t started considering any new applications.” All this spells disaster for many ordinary people – and especially those already hoping to buy property.
According to the National Bank of Georgia, the central bank, the country’s authorities are in negotiations with the IFC, EBRD, Asian Development Bank and other financial institutions, and an agreement has apparently been reached on low-interest lines of credit for up to $1 billion to be extended to commercial banks of Georgia.
In August-September the National Bank intervened to support the lari and kept the exchange rate at $1/GeL1.4, to protect the currency market from panic. The National Bank says it sold $183 million on the interbank currency market in August, and by September it was in a position to buy back some $32 million.
Inflation
The inflation outlook is likewise optimistic, says the National Bank, and predicts an annual end of financial year rate of 8%.
But elsewhere another picture emerges. According to data from the country’s Statistics Department, annual inflation hit 12.8% year-on-year at the end of August. This compares with 9.8% at the end of July. The department reveals that many household expenses have soared: fruit prices by 136%, oil by 44%, bread by 34%, transport by 29% and water, energy and gas also by 29%. Prices decreased by 11% on clothes and footwear.
Despite this, the National Bank states that it does not plan to change its inflation forecast, citing deflationary pressures emerging in October.
The conflict between the optimism of the National Bank and the government and the reality of the situation is puzzling. “I don’t have all the information, but what I do have appals me,” says Niko Orvelashvili, an economist. “The damage is about 10 times higher than what the state believes it is.”
The parliamentary opposition acknowledges that the government may be withholding data in order to prevent alarm. “We are aware that not all the data can be published, because this could cause panic,” Levan Vepkhvadze, vice-president of the parliament and member of the opposition Christian Democrats, tells Emerging Markets.
Former finance minister Lekso Aleksishvili tells Emerging Markets a simple glance through the figures would show some of the scale of the losses: “Officially GDP was expected to grow by 9% in 2008. That would mean the face value of GDP would be GeL20 billion. Instead, in the aftermath of the armed conflict, there can only be an increase by 3.5–4.0% in the best case.
“This means that the Georgian economy sustained damage of up to GeL800–1,000 million ($570–710) in 2008. We’d expect damage to the economy would amount to the same sort of figure in 2009 as well.”
Infrastructure damage
One of the areas most damaged has been transport and communications. A spokesperson for the main port of Poti said that it was operating at just 35% of its capacity because of the destruction brought through the Russian air raids.
Earlier this year, Rakeen Investment, a company from the United Arab Emirates, bought 51% and the territory surrounding it for $90 million, making it the biggest recent investment in the country. The company undertook to build a new port three times larger than the old one. Investment had begun to flow in, and Rakeen Investment says it intends to sue Russia in international courts.
A spokesperson for the Georgian railways said the rail network had sustained damages of the dollar equivalent of over $1 million as a result of the conflict.
The biggest investment in Georgia, the Baku-Supsa pipeline, has been stopped for security reasons. And flows of oil on the Baku-Tbilisi-Ceyhan pipeline are around two times less than were moved in July. Oil company BP, however, says this was due to an explosion in Turkey; it was unrelated but coincidental with the conflict.
Against such a background, bringing investment back to Georgia is going to take time. Convincing investors that the political risks are low is a long process. The economy ministry is reluctant to talk about this, but various high-profile business ventures have either stalled or failed.
In September, Kazakh investors pulled out of building a $4 million wheat terminal in Poti. Georgian football player Kakha Kaladze, a well-known public figure, declared in September that his company Kala Capital would stop all projects in Georgia. Progress Bank owned by Kaladze discontinued negotiations about a merger with Agroinvestbank. And a large construction project known as Arsenal was terminated.
Luckily, international assistance is beginning to flow in: the US government has promised financial aid amounting to $1 billion. The US Senate has already agreed to disburse the first tranche of $365 million. The IMF is promising a concessional loan worth $750 million for Georgia’s financial institutions, with the first third to be made available this year. The World Bank in turn has already set up a $40 million credit line. The European Union is considering aid worth E500 million.