IMF sees recovery in FDI in Georgia

Georgia's successful Eurobond issue this month was a sign of growing confidence in the country that should spur a rise in foreign direct investment, but the country still needs to curb its current account deficit, the IMF said on Thursday.
David Owen, deputy director of the Middle East and Central Asia department, said the International Monetary Fund expects economic growth of 5.5 percent in the ex-Soviet republic in 2011, driven by the development of the tourism, power and infrastructure sectors.
According to IMF figures, gross domestic product (GDP) in Georgia grew over 6 percent in 2010, recovering from a 3.8 percent contraction in 2009, as banks freed up credit for the private sector and export demand grew. Georgia placed a $500 million 10-year Eurobond earlier this month with a coupon rate of 6.785 percent and tendered to buy back $416.7 million worth of its outstanding $500 million 2013 Eurobond via an "any and all" tender ahead of a new issue.
"I think the Eurobond issue was a great success and it will certainly be very helpful for Georgia as it smoothes out the profile of debt service payments in the years ahead," Owen said. "It will also be a sign of a lot of confidence, investors' confidence, and we certainly expect that foreign direct investment will pick up in the period ahead." Georgia's investment-driven economy was hard hit by a five-day war with Russia in August 2008 and then the global crisis, which slashed foreign investment. Foreign aid helped plug the gap.
According to the IMF, the country of 4.5 million people could attract $700 million in foreign direct investment (FDI) in 2011 after drawing less than $600 million in 2010. Owen praised Georgia's central bank for conducting a balanced monetary policy aimed at keeping inflation under control without hurting economic growth, and said it should manage to bring inflation back to single digits in 2011.
The central bank has been raising interest rates since June last year to keep inflation at bay. It raised the refinancing rate in February to 8.0 percent from 7.5 percent, but kept it unchanged in March and April. Consumer prices rose 13.9 percent year-on-year in March, accelerating from a 13.7 percent increase in February and well above the government's forecast of 7.0 percent for 2011.
"I think it's very realistic to expect it (annual inflation) to be back to single digits by the end of the year," Owen said. "As for recovery, it looks now more well established and I think it would be possible to tighten policy a bit more without threatening the recovery." Owen said the government should address the problem of a large current account deficit.
The external current account deficit was over 20 percent of GDP in 2007-08, but it dropped to under 10 percent in 2010. "With higher food prices and oil prices there could be a small widening of the deficit this year and it's going to be important over the medium term to have more adjustment to bring this deficit down," Owen said. The IMF, which is extending aid to Georgia under a $1.2 billion three-year programme that expires in June, is discussing with the government the prospects for a future arrangement.