“TBC Bank didn’t attract foreign direct investment but portfolio investment, instead. In total, the volume of foreign investments, both direct and portfolio, has increased by 20%.”
in the first quarter of 2014 amounted to USD 272 million whilst in the second quarter it decreased by 45% and equalled USD 151 million, which is 28% less as compared to the same index of the last year.
On 10 September 2014, after the Government meeting, Nodar Khaduri made a statement about the investments made in the country: “The structural change happened in the second quarter. TBC Bank did not attract foreign direct investment but portfolio investment, instead. In total, the volume of foreign investments, both direct and portfolio, has increased by 20%.” According to the Minister of Finance, there is no sign of an emergency; portfolio investments, however, replaced foreign direct investments as a part of the structural change, which took place. The Minister was referring to the portfolio investments attracted by TBC Bank on the London Stock Exchange.
FactChecktook interest in Mr Khaduri’s statement and verified its accuracy.
According to the data of the National Bank of Georgia, the volume of FDI made in the second quarter of 2014 was equal to USD 151 million whilst portfolio investments amounted to USD 209 million from which a portfolio investment in the amount of USD 207 million was made in the banking sector. As for 2013, USD 208 million was invested in the second quarter of the last year whilst portfolio investments decreased by USD 94 million. In total, the portfolio investments in the second quarter of 2013 amounted to USD 114 million.
Both portfolio investments and FDI totalled USD 360 million in this year’s second quarter, which is 3.1 times more than the same index of the last year. Compared to the first quarter of 2014, this amount is 24% higher. It should be noted that the increase came with the inflow of portfolio investments whilst the amount of FDI notably decreased this year.
Source: National Bank of Georgia
Graph 1 shows that the biggest collapse in the volume of FDI took place in 2009 as a result of the consequences of the Russo-Georgian war and the world financial crisis. An increase in FDI, however, continued from 2010. The year 2012 marked the change in the government, which was also negatively reflected in investments. In 2013, there was almost no increase in FDI in Georgia. A decrease in FDI negatively affects the formation of new capital and inhibits the process of the economic development of a country. It is necessary to attract more and more investments each year for the economic growth rate not to decrease. An example of this was seen in the decrease in the economic growth rate in 2013 owing, in part, to the overall insignificant increase in FDI as compared to 2012.
In the second quarter of this year, the largest amount of FDI was made in the transport and communication sectors (USD 101 million) which is 2.3 times more than the same index of the last year. Industry is in the next place with USD 58 million in FDI, which is twice as much as the amount of the last year. The energy sector is third on the list with USD 45 million in FDI, which is 1.5 times less than the amount last year (USD 71 million).
As for the financial sector, there has been an outgoing investment valued at USD 127 million although portfolio investment valued at USD 207 million was received at the same time following TBC Bank’s sale of shares on the London Stock Exchange. Therefore, the Minister is correct when he says that TBC Bank attracted portfolio investment. However, it is incorrect to view this portfolio investment as a substitute for FDI. For an investor, FDI means purchasing real capital and participating in a venture’s management whilst portfolio investments are those investments made in securities and are generally speculative in their nature. Portfolio investments are usually long-term and sensitive to economic shocks whilst foreign direct investments are more stable and represent a long-term financing source for the business existing in a country. Therefore, the dynamics of FDI provides us with important information about the investment environment and the economic development of a country. The reason for a decrease in FDI can be an unstable political environment or a frequent change of regulations that increase economic risks and force foreign investors to refrain from making long-term investments in a country.
As for the investment funding received by TBC Bank, in spite of its high volume, it may still be considered as an unstable investment because the investor is able to freely transfer the money to a country with a more stable economy in the event of a negative change in the local economy. If this happens, the transfer will increase the negative effect of the economic shock. Therefore, economists use the dynamics of FDI to analyse macroeconomic stability.
Of note is that portfolio investments have always been made in Georgia although they were not added to FDI in terms of statistics.
Source: National Bank of Georgia
As can be seen from the above graph, FDI and portfolio investments halved in 2013 as compared to the previous year and experienced a fall from USD 1,793 million to USD 900 million although this escaped the attention of most as the Government had emphasised FDI alone.
Although the sale of shares by international organisations led to the decrease in FDI and an increase in portfolio investments in the financial sector in the second quarter of 2014, it is still incorrect to add FDI and portfolio investments together with the aim of rating the investment environment in the country.
It is important to know that FDI is calculated by subtracting the decrease in the liabilities towards investors from FDI inflows. Graph 3 shows that the decrease in FDI in 2013 was caused not by the decrease in FDI inflow but the decrease in FDI made in the previous years (the decrease in the liabilities towards investors).
Source: National Statistics Office of Georgia
Conclusion
Foreign direct investment (FDI) in the second quarter of 2014 amounted to USD 151 million, which falls behind the same index of the last year by 28%. Portfolio investments equalled USD 209 million in the same period. In total, FDI and portfolio investments made in the second quarter amount to USD 360 million which is three times higher than the same index of the last year and 24% higher than the investments made in the first quarter (FDI + portfolio). In addition, it must be noted that the increase is mainly due to the investments received in the banking sector.
Investment worth USD 207 million was indeed made in the banking sector although it is noteworthy that it is incorrect to regard portfolio investments as a substitute for FDI as the aim of the foreign direct investments and portfolio investments differ as well as their effect on the economy. Foreign direct investment is long-term and stable unlike a portfolio investment, which is more sensitive to economic shocks. In addition, the outflow and inflow of portfolio investments has been taking place every year although they were added to FDI only in this year.
FactCheck concludes that Nodar Khaduri’s statement: “TBC Bank didn’t attract foreign direct investment but portfolio investment, instead. In total, the volume of foreign investments, both direct and portfolio, has increased by 20%,” is MOSTLY FALSE.
Foreign direct investment (FDI) is an investment made by a non-resident person which exceeds 10% of the authorised capital and allows the investor to participate in the management of a venture. Investments which are less than 10% of the authorised capital are called portfolio investments.
