These days I’ve been working on a few papers related to my own business and the challenges I may face in 2016, apart from business-specific challenges I ended up with several global disadvantages/or advantages and decided to share it with you.
As we are aware doing business is affected by numerous factors, starting from the personal mood and ending with a mood of head of the government ruling some leading country (it is especially sensitive in our Caucasus/Black Sea region), whose decision may also influence you. Even if we consider we all will be in a positive mood, some challenges will still persist. As it seems, in 2016 these challenges will be key factors determining growth or decrease in our sales, rise and fall of the money and etc. So here it goes:
i) The Downfall of the Chinese Economic Growth
Why I call it a ‘downfall’, well that’s because I think the super-high double digit growth the Chinese enjoyed before is already a part of academic case studies (to be reserved I add ‘for visible future’). Chinese Economic Growth Rate is going down and it is already a fact. Chinese stock market collapsed twice last year and the third fall was observed at the very beginning of the present year, dragging other stock markets to the bottom. Chinese Government activated various instruments, starting from time tested currency devaluation and ending with, not so popular restriction of a capital flow. Time will show how efficient these instruments are, however one thing is obvious – in 2016 Chinese Economic Growth will not be in its best shape. The latter will certainly be reflected on stock markets, energy resources, prices of other mineral resources and so on, as the largest consumer of these resources is China. This will most probably result in cheapening of Chinese products through currency manipulation. This challenge will not have huge direct impact on Georgia; however various indirect effects are expected to follow, as all great economies of the world will feel the effects of Chinese problem in different ways. One thing is obvious – slowdown of the Chinese Economic Growth will slow World Economic Growth.
Also don’t panic, China is not run by the Social-Democrats, which means the Government is capable for making not-so-popular reforms, and eventually the economic growth will stabilize at some steady level. Now what could be the positive out of the overall negative news; thinking from my business prospective, it lowers my expenditures for Chinese produced goods, gives me a better chance to compete with others with again Chinese goods (I just hope Huawei makes its production cheaper), at a broader level it sooner or later will make investment analysts horizon wider and beyond China thus eventually Georgia may become somehow better visible. I guess it will accelerate Chinese capital injection into the emerging markets even more, the good for us is the reinvented Silk Road project is already in place with its multi-modular transportation, and its completion may turn around lots of things in our land, imagine the railway coming from Shanghai, crossing Central Asia and Caspian Sea directly to the Georgian sea ports on the Black Sea, I know it sounds too optimistic, also the bigger port is still under construction but the development is given and factual (if anyone wants some more scientific proof can ask me or Google independently).
Regarding the Chinese economy, to make sure you don’t downgrade it too fast, have a look of infographic below, it hosts the largest number of billionaires after the States! (and I made it! So far only the chart of billionaires in infogr.am, highly recommend).
Source: Forbes, 2015 ranking, http://www.forbes.com/billionaires/list/
ii) Decline of the Oil Price
Decline of the oil prices shall continue – this is widely acknowledged short-term viewpoint. However there also is another prediction, stating that at the end of the year, price for a barrel of oil will increase and stabilize somewhere within the range of 50 USD, well… there are so many predictions now flying around, but one thing is true, fall never lasts forever, and for those are worrying too much, I can say, yes, Tesla is a reality now, BMW drives without gas, and many others are testing the non-gas mechanics, but it is obvious the World is no way close to abandoning oil and switch to Thorium (I highly recommend to see new Norwegian TV series https://www.netflix.com/title/80092654, it gives far better understanding of reality compare to many experts), thus soon oil price will find its new comfort zone. Likewise the Chinese challenge, this process may have both positive and negative impact on us. The negative side is that decline of the oil price equals decline of world economic growth, as the two are developing simultaneously. Problems will also emerge in the region, stretching from North to South. Latter problems unfortunately will negatively affect Georgia. It seems that foreign remittances will stick to the trend of decline (half of them are supposed to come from Russia); export will either reduce or will not grow. Investments are also expected to be cut. All aforementioned concerns mainly Russia, Azerbaijan and Kazakhstan, of course. From the investment viewpoint, dependence of Arab states on oil prices will also worsen situation, as the decline will certainly not facilitate fulfillment of their investment obligations in Georgia. How that might affect my own business? Well, firstly it absorbs the negative impact of increasing Dollar and even overwhelms it, so simply it makes transportation/production cheaper, probably the latter is not too relevant to Georgia but in terms of making transportation cheaper it definitely has the positive impact, maybe the flight tickets won’t become too cheap but at least they won’t increase in prices, and it’s the great attraction for tourists too. Another fruit for us is again the comparative study the investment officers can make and come to the conclusion that in long term it is far safer to invest in oil-free liberal economies (that’s what we are, certainly in part 1.).
To make it clear where does oil prices stand in terms of historical perspective, I prepared another infograph:
iii) Economic Problems of Russia
Economic difficulties facing Russia make separate challenge for our region. Despite Georgia not being directly tied to Russian difficulties, from the trade point of view, still will suffer direct effect through remittances and trade and investment related consequences from the CIS states affected by the Russian economic decline. And the bad news is the Russian economy is in a really bad shape and of the price for a barrel oil will be maintained within the 20-30 USD range for following months, it will face decisive challenges. Of course this will not lead to its total collapse but what the most matters to us will change: consumption of Russian market will decrease, products will cheapen, and effective salaries of employees will be reduced. This problem, unlike Oil and Chinese challenges, is just a problem for us, with no prospective positive economic sides but one, maybe even a few. Before getting into in, let me mention that as a professional economist I strongly believe there are no bad bad situations, as a businessman I am self-taught to transform the challenges into opportunities and after all I am an optimist. Where I may find its positive side is tourism and it already feels so in Gudauri, how one can use it?, it is quite simple if you are in that business leverage Russian, add things Russian average visitor may find attractive, that’s exactly what I am doing now while creating a new tourist routs in Tbilisi attached to our hotel.
Below I put some infograph, I have chosen the Russian Central Bank International Reserves, and probably it is the most legitimate tool to describe where Russian economy is right now (don’t mistake it with Russian sovereign wealth fund).
Source: The Central Bank of the Russian Federation, 2016, http://www.cbr.ru/
iv) Strong US Dollar
When the price of the oil falls, Dollar increases in value (also, not always). This depends on many factors; however they do not matter for the result. This issue carries both positive and negative shades for us. The negative is obvious: the money will get expensive. After 2008 Crisis century of cheap money was left to a history, however capital was still being cheapened through economic stimulus. It seems that in 2016 the capital will rise in price. As for the positive side – expensive capital searches for more profitable projects, so we have an opportunity to establish a good niche. Strong US Dollar means cheaper national currency, oh sorry, I don’t want to insult anyone I rather say competitive, so with competitive currency as it follows we end up with competitive export, and increasing competitiveness of currency means increasing competitiveness of export, why I am pedaling this because of ‘clever’ hysteria caused by every minor ups and downs in currency exchange rate.
For those who wonder why that single country specific currency – US dollar matters that much see the infograph below, in the world there are 180 currencies (those recognized by the UN), while circa 64 per cent of all official foreign exchange reserves are allocated in US dollars. No egality!
Source: Wikipedia, data from Q2, 2015
v) Increased Military Activities
Syria and Ukraine, these military actions have undisputed negative impact on economies and it is clear that nobody is insured against their shards, including us. Sadly there is no hope they may end in 2016 (the politics of mighty states make it so clear). Syria at this stage is lesser of an issue (still has a proxy route through Turkey) for us however Ukraine conflict has obvious negative impact on Georgia from the trade viewpoint, therefore further development of conflict situation will bring no good. But is that all negative there?, well… it gives a chance to identify us as a responsible country, a robust economy which has already gone through a war with Russia without a default, it identifies us responsible in terms of politics as a country who has signed a DCFTA with the EU and is about to have a visa-free regime with Europeans while the relations with Russia are not worsening.
Overall, the challenges are obvious, however neither of them is critically damaging, even contrary most of them could be used as an advantage. And to use these advantages we need the entrepreneurship spirit, otherwise capital and labor are becoming abandoned these days. That’s exactly the topic I want to share with you next time.
Please do not hesitate to contact me in case you want to know what is going on in World Economy and how it may impact your own lifestyle.