Investment Adventures in Emerging Markets

Georgia on My Mind

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The glass and steel-framed Bridge of Peace over the Mtkvari River in Tbilisi

My team and I recently traveled to Georgia, a small country in the Caucasus Mountains straddling the border between Europe and Asia. Why are we interested in Georgia? One word: reform. Georgia, which can be considered a frontier market, is on the cusp of burgeoning change.

Georgia gained independence from the Soviet Union in 1991, is strategically located east of the Black Sea, and is bordered by Armenia, Azerbaijan, Russia and Turkey. To understand what is happening in Georgia today, we need to go back in history. Not only has Georgia been the victim of many invasions, but the importance of Russia in its history cannot be underestimated. Russian dictator Joseph Stalin, who led the USSR (Union of Soviet Socialist Republics) from the mid-1920s until his death in 1953, was Georgian.

Georgia controls much of the Caucasus Mountains and the routes through them, giving it strategic importance in the region. Construction of the Baku-Tbilisi-Ceyhan oil pipeline, the Baku-Tbilisi-Erzurum (South Caucasus) gas pipeline, and the Kars-Tbilisi-Baku Railway is part of a strategy to capitalize on Georgia’s key location between Europe and Asia, and help develop its role as a transit point for gas, oil and other goods.

Our team’s entry point into the country was the beautiful resort town of Batumi on the Black Sea coast. It was immediately evident that Georgia was embracing change and making a statement of progress through its architecture. As we landed, the airport navigation tower at Batumi looked like a jewel at night with hundreds of lights surrounding the tower and the adjacent circular building.

A very modern looking fast-food restaurant in Georgia

The Sarpi Customs Terminal Building, designed by German architect Jürgen Mayer-Hermann, is an incredible shape formed into a series of curves and abutments. As we drove through the city, I was struck by the sight of the most modern McDonald’s restaurant in the world I’ve ever seen. It looked like a rocket ready to take off. The old part of the city has been beautifully restored, featuring a variety of architectural styles from empire and art deco to the traditional Georgian structures topped with unusual steeples. Traveling around the country, I was awestruck by the interesting new architecture, as well as the extensive renovation of older structures taking place.

Growth and Change

Since the “Revolution of the Roses” or “Rose Revolution” in 2003 that marked a shift in political power and the end of the era of Soviet leadership, Georgia has undertaken dramatic reforms. While it suffered market setbacks in 2008–2009, Georgia has seen strong annual GDP growth rates of 6% to 7% from 2010–2012.1 Georgia’s debt-to-GDP ratio is a modest 36.30%2and inflation appears contained. Growth drivers for the economy include tourism and agriculture, in addition to substantial overseas workers’ remittances that have helped drive an increase in foreign reserves.

Meeting Georgia’s Prime Minister at the time, Bidzina Ivanishvili.

What really drew me and my team to Georgia was its recent transformation toward a modern and fair society, one where the government appears to be treating its citizens properly. The most impressive thing I learned from talking to people living in Georgia was how much the old ways had been discarded and how the government had become more efficient. The World Bank’s “Ease of Doing Business” survey ranked Georgia 8th out of 189 countries in 2013, a dramatic move up from its ranking of 133 in 2005.3

Georgia’s Public Service Administrative Building, which handles land registration and passport issues under one roof, is a showcase of transparent and modern public administration in the country. In general, I found Georgia’s infrastructure truly impressive.

Inside Georgia’s public service administrative building

I was also impressed by what appeared to be a dramatic reduction of corruption in Georgia. In fact, one of the key questions I ask any government leader I have the opportunity to meet with is: What specific reforms are you undertaking to reduce corruption? I also want to know what plans are in place to grow the economy and reduce taxation, while making government more efficient. Our team had the pleasure of meeting with Bidzina Ivanishvili, who was Georgia’s Prime Minister at the time, to discuss our concerns and talk about opportunities in the country.

In 2013, the Heritage Foundation’s Economic Freedom Index, which measures the economic freedom of countries based on trade freedom, business freedom, investment freedom, and property rights, ranked Georgia 21 out of 161 countries.4 Starting a business is relatively easy in Georgia, with registration possible in one day. Foreigners do not require special work permits, and nationals from more than 80 countries can enter Georgia and stay for 360 days without a visa. In addition, the tax structure in Georgia is relatively simple and attractive to investors.

As in any country, there are revisionists in Georgia who want to go back to the old ways. Also, like other countries, there still is corruption, although it has been dramatically reduced. These are problems we should be aware of, and we must watch Georgia’s relations with Russia to ensure they remain on an even keel. Of course, investing in any frontier market— generally considered the smaller, less-developed subset of emerging markets—carries heightened risks, including potential price volatility, market illiquidity and lack of established legal, political, business and social frameworks to support securities markets.

As Templeton seeks potential investment opportunities around the globe, the thing we look for first and foremost is growth potential. Economic growth can act as a driver of company growth and potential profitability of a company, and that is something we want to see. We look for well-managed companies that we think are capable of taking advantage of a country’s economic growth. We also aim to visit as many companies as we can and meet the management. Then we like to talk to the companies’ customers and competitors. Lastly, we speak with government officials who are involved in regulating and monitoring the businesses in which we may invest.

We are confident that many of the objectives toward modernization and liberalism will be accomplished in Georgia, and that has driven our search for investment opportunities there. My team and I greatly enjoyed our visit, and hope to be back!

1. Source: The World Factbook 2013-14. Washington, DC: Central Intelligence Agency, 2013.

2. Source: The World Factbook 2013-14. Washington, DC: Central Intelligence Agency, 2013; 2012 est. as of December 2013. Includes cumulative total of all government borrowings less repayments that are denominated in a country’s home currency.

3. Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9615-5. License: Creative Commons Attribution CC BY 3.0

4. Source: Source: 2013 Index of Economic Freedom, The Heritage Foundation.


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