Georgian Economy - Back in Business 080825

Standard & Poor’s: B/Watch NegativeFitchRatings: B+/Negativeg g

The Georgian Economy

Back in business, with a little help from our friends

CONFIDENTIALRestricted distribution

August 2008

Introduction

The main body of this presentation describes the achievements and stateof the Georgian economy as of 7 August 2008, as well as the economic,g y g , ,fiscal and monetary policies that have been at the heart of our success

The direct and indirect damage to the Georgian economy, as well as theg g y,economic security vulnerabilities exposed by the Russian invasion, aresubstantial and may prove irreversible without urgent and massiveeconomic and financial support from our friends and allies

We have set out in the introductory part below the key factors adverselyaffecting the Georgian economy in the aftermath of the Russian invasion.While the assessment of the scope of the damage and vulnerabilities isbeing carried out, we believe the cause-effect analysis and estimateranges set out below to be directionally accurate

Back in business, with a little help from our friends August 2008 1

Possible Further Objectives of Russia With Regard to Georgia

Achieve regime change in Georgia by means other than direct military conquest, forinstance by inducing economic collapse, resulting in social upheaval

Damage the credibility of Georgia as a regional trade, transportation and logistics hub inDamage the credibility of Georgia as a regional trade, transportation and logistics hub ingeneral, and as an important transit route of Caspian oil & gas in particular

(Unsuccessful) air strikes the pipelinesContinuing presence in Poti, the main container port for the CaucasusContinuing acts of sabotage on the Georgian railwayPresence of illegal checkpoints close to the main East-West highway


Direct Economic Damage Caused by the Russian Invasion

Direct damage has been estimated at or higher than US$1 bn (approximately 10%of 2007 GDP) – preliminary estimates are set out below• Roads in need of repair as a result of the Russian armor movement circa• Roads in need of repair as a result of the Russian armor movement circa

US$150 mln• Destruction of other civilian infrastructure and damage to private property

circa US$350 mlnf l h d l d $ l• Cost of resettling the displaced persons circa US$100 mln

• Farmland and crops circa US$100 mln• Environmental damage circa US$200 mln

• Forest fires in Borjomi and Ateni ValleyForest fires in Borjomi and Ateni Valley• Railway explosion near Skra (14 rail cars with oil burnt & spilled)• Fuel spilled into Black Sea from the Georgian navy ships damaged or sunk

by the Russian navy• Other

• Loss of fiscal revenue in August-December 2008 of circa GEL 400 mln (US$290mln) – belying a far greater decline in economic activity for the rest of theyearyear

• Increased shipping and logistics costs in August-December 2008 of circaUS$100 mln

• These estimates do not include the damage to our military infrastructure


Key Threats to the Economy – Erosion of Consumer Confidence

The two major threats are the erosion of consumer confidence and the erosion ofinvestor confidence. We will address each separatelyConsumer confidence would remain low for the rest of the year even if RussiaConsumer confidence would remain low for the rest of the year, even if Russiaundertakes no further hostile acts

This would have a direct and immediate adverse effect on demand for residential realestate and durable consumer goods, as well as tourism and travelThe fragmented and nder capitalised real estate de eloper ind str alread s fferingThe fragmented and under-capitalised real estate developer industry, already sufferingfrom the high interest rate environment, would suffer, with an estimated 30+developers possibly becoming insolventThe direct banking sector exposure to the developers at risk is estimated at circa GEL200 mln 50% provisioning may well be in order in the short term (over 6 months)200 mln. 50% provisioning may well be in order in the short term (over 6 months)In addition, the banking sector exposure to mortgages on properties sold off-plan by thevulnerable developers is estimated at GEL 75 mln. Again, given the low probability ofany of these buildings being completed any time soon, 50% provisioning may well be inorder in the short term (6 12 months)order in the short term (6-12 months)

In addition, the banking sector exposure to the tourism and hospitality sector, retail sector(affected by both the decline of consumer demand and losses due to transportationdifficulties), as well as the regional economy in central Georgia (near Gori) may result inadditional sector wide provisions of up to GEL 100 mlnadditional sector-wide provisions of up to GEL 100 mlnThe overall decline of business activity in several key sectors of the economy would requireadditional provisioning of circa GEL 100 mln on outstanding consumer loans and credit cardbalances


Erosion of Consumer Confidence and its Consequences cont’d

Thus, the adverse effect on the banking sector over the next 6-12 months due to the erosionof consumer confidence may be expected in the GEL 200-400 mln range

This adverse effect will likely be exacerbated by additional provisions of up to GEL 50 mln dueto the reduced demand for goods and services from the government (itself a result of theneed to cut budget expenditures due to the expected decline in fiscal revenue)

To place the above numbers in context, the aggregate 2008 net income of the banking sectorprior to the Russian invasion had been estimated at GEL 200-250 mln

Such a dramatic swing in the profitability despite its one off nature implies that theSuch a dramatic swing in the profitability, despite its one-off nature, implies that theeconomy would be deprived of circa GEL 0.8-1.5 bn of incremental bank lending in 2009 (dueto capital adequacy requirements). The adverse impact of this alone on the economy,especially given the expected reduction in private capital inflows, could be equal to 4%-5% ofGDP and a significant increase in unemployment and decline in fiscal revenue The aggregateGDP and a significant increase in unemployment and decline in fiscal revenue. The aggregateloan book of the banking sector stood at GEL 5.5 bn at 30 June 2008, having grown in 1H 2008by GEL 0.9 bn or 20%

In addition d e to the c rrent liq idit constraints the banks ma ell need to red ce o erIn addition, due to the current liquidity constraints, the banks may well need to reduce, overthe next 6 months, their current loan books by an aggregate of GEL 500 mln, further deprivingthe economy of credit


Erosion of Consumer Confidence and its Consequences cont’d

Given that approximately 60% of the above-mentioned provisions pertain to loans in US$, thebanks would need to purchase over the next 6 months approximately US$150-200 mln in theopen market to keep their open foreign currency position in check

This additional demand for US$, in the context of Georgia’s BOP structure and reduced privatecapital inflows, may well result in the 10%-20% depreciation of the Lari over the next 6months – even if no further waves of panic withdrawals of liquidity or conversion of GELmonths even if no further waves of panic withdrawals of liquidity or conversion of GELbalances to US$ occur

Such a depreciation of the Lari may well unleash a second wave of problems for the bankingsector, resulting in difficulties in repaying foreign currency borrowings in the worst case, orreducing the banks’ ability to borrow internationally in the best case – thereby causing furthercredit contraction with attendant adverse effect on the economy


Erosion of Investor Confidence and its Consequences

Georgia, with Current Account Deficit (CAD) of approximately 20% of GDP in 2007 andprivate capital inflows of circa 23% of GDP in 2007 (including FDI of 19.8% of GDP and theremainder comprising foreign borrowing and portfolio investment), is critically dependenton foreign investment inflows for growth and balance of payments financingIf, as and when foreign investment inflows evaporate or fail to recover to anywhere nearthe pre-invasion levels, as is currently expected, and further international borrowing by thebanks is impeded, the economy would be deprived of circa 4%-5% of growth, with attendantp , y p g ,effects on employment and fiscal revenueThe CAD will likely contract significantly, as FDI-driven imports of capital goods comprised(pre-invasion) circa 60% of total imports, but a financing gap may nonetheless arise, puttingfurther downward pressure on the Larifurther downward pressure on the LariConsumer imports would contract as well, putting further pressure on the consumer-oriented sectors of the economy. In addition, should Russia move to restrict in any wayremittances to Georgia (over 60% of aggregate remittances of circa US$800 mln in 2007came from Russia) this may trigger a collapse in the consumer economy and set back thecame from Russia), this may trigger a collapse in the consumer economy and set back thestandard of living by several years – with consequent social ramifications and potentialpolitical instabilityEven if the worst-case scenario, laid out above, is avoided, reduced investor appetite forinvesting in Georgia will likely deprive the economy in the short term of approximatelyUS$2-3 bn of funding for critical infrastructure upgrade and rehabilitation projects. Delay inthe implementation of these infrastructure projects will impede considerably the ability tosustain high rates of economic growth in the medium term


Adverse Impact of Any Future Hostile Actions by Russia

The above analysis is static in a sense that it describes the adverse effects on the Georgianeconomy of the Russian actions to dateFurther adverse effects on the economy, potentially leading to economic collapse and socialy, p y g pupheaval, include

Continuing illegal presence of the Russian troops and checkpoints and possibleattempts to impede the flow of goods and people by extorting bribes or prohibitingoutright the movement of civilian cargooutright the movement of civilian cargoAny movement of troops causing consumer panic and a new wave of liquiditywithdrawal from the banking sectorNew acts of sabotage and explosions, further damaging our civilian infrastructure.The economy overall and consumer and investor confidence are particularlyvulnerable to further damage inflicted on the railway and other transportinfrastructureAny restrictions on remittances and bank wire transfers to Georgiay gThreatening statements by the Russian leadership, further heightening the investors’anxiety


Request for US Economic Recovery Package for Georgia

The US$750 mln Stand-By Arrangement the IMF is currently contemplating is an important measure toensure macroeconomic stability and financial sector liquidity

However, given the threats and vulnerabilities of the Georgian economy described above, much moreis needed for Georgia to avoid economic collapse and commence recovery

US$1-2 bn cash grants by the United States and Europe to the Phoenix Fund (established with theWorld Bank’s help and oversight as a multi-donor trust fund) for damage repair, rehabilitation andupgrade of critical infrastructure

Replaces the private sector and fiscal funding that is no longer available for such projects

Enhances Georgia’s energy and transport security

Tangible manifestation that the US and other friends and allies will not let the Georgianeconomy fail – helps restore consumer and investor confidenceeconomy fail helps restore consumer and investor confidence

US-Georgia Free Trade Agreement

Extended availability (for 10 years) of OPIC political risk insurance

Available to the Georgian government for any government-owned assetsAvailable to any owner/investor in key strategic assets on Georgian soil identified by theGeorgian government

These measures would send a strong message to the Georgian population and global investorcommunity (as well as Russia) that US economic interests are allied with Georgia’s – thereby playinga crucial role in restoring consumer and investor confidence and helping Georgia avert the negativescenario outlined above

Given that the vulnerabilities we have identified may play out in the next few months, it is criticallyimportant that these steps are taken – and properly publicised – as quickly as possible


Overview of the Georgian Economy


Country overview

Population: 4.6 mln (Department of Statistics)

Capital: Tbilisi

Government type: Republic

Area: 69,700 sq km (26,911 sq miles)

State language: Georgian

Major religion: Christianity

Life expectancy: 69 years (men), 77 years (women)(UN)

Median age: 38 years

Monetary unit: Georgian Lari (GEL)y g ( )

GEL/US$: 1.4130, GEL/EUR: 2.1476

2007 GDP: GEL17.0 bn (US$10.2 bn)

2007 GDP per capita: GEL3,868 (US$2,315)

2007 Real GDP Growth: 12.4%, versus 9.4% in 2006and 9.6% in 2005

CPI: 2007 period average was 9.2% versus 9.2% in2006 and 8.2% in 2005

Net FDI inflows: US$2,014.8 mln in 2007 versusUS$1,076 mln in 2006 and US$542 mln in 2005

Source: CIA Factbook, BBC


Key Investment Highlights

Sustained liberal reforms in 2004-2008

• Modernisation of the state and civil service

• Successful supply-side fiscal experiment with low, flat and decreasing taxes

• Radical deregulation and liberalisation

Rapid economic growth (9.3% in Q1 2008, 12.4% in 2007, 9.4% in 2006), driven by

• The Schumpeterian burst of entrepreneurial activity

• Rapid credit expansion

• Growth in domestic consumption led by the rapidly expanding middle class

• Rehabilitation of infrastructure

• Export growth (‘03-‘07 CAGR of 26%) and diversification

• Steadily increasing remittances (US$775 mln in 2007 vs. US$87 mln in 2003)

• Off-the-charts high FDI inflows (19.8% of GDP in 2007, 13.9% of GDP in 2006, cumulative in 1996-2007 54% of ‘07 GDP)

High resilience to external shocks (e.g. energy & commodity prices, Russian embargo, sub-prime meltdown)

Fresh five-year mandate to continue implementing reform-oriented policies

Key investable sectorsy

• Financial services

• Agribusiness/consumer goods

• Real estate

• Hydro power generationy p g

• Tourism & hospitality

• Retail

• Transport & logistics


Sustained liberal reforms of 2004-2008 have laid a sound foundation for long term sustainable growthfoundation for long term sustainable growth

Positive political outlook• Fresh five-year mandate for the confirmation of the reforms afterPresident Saakashvili’s first-round re-election (53.5%) and parliamentary l ti i 2008

Prudent fiscal policy• Low, flat and decreasing taxes• Mandatory fiscal surplus from 2009• Sovereign wealth funds being created• Expenditure cap of 25% of GDP considered f 2011 elections in 2008 from 2011

Vibrant & rapidly growing financial sector• Banking sector assets/GDP at 44% at YE2007, up from 16% at YE2003• Assets ‘03 – ’07 CAGR of 52%

Effective monetary policy• Move to explicit inflation targeting in 2009• CPI target limited by law to single digits• Parliamentary confidence vote on central bank governor

Robust Economic Performance &

Assets 03 07 CAGR of 52% • Loans ‘03 – ’07 CAGR of 57%• Deposits ‘03 – ’07 CAGR of 48% • No state-owned banks since 1996• No restrictions on foreign ownership of the banks, 7 of the top 10 banks foreign-controlled• NPLs at a manageable level of 2.6%, predominantly collateralized lending

• Parliamentary confidence vote on central bank governor in case of four consecutive quarters of +/- 2% deviation from the target• Period average CPI of 9.2% - 10.2% since 2006• Main policy rate increased by cumulative 500bps (to 12%) since November 2007• YTD CPI of 3.2% • July ‘08 y-o-y period-end CPI of 9.8% - one of the lowest

Sustained Growthpredominantly collateralized lending• BIS CAR of circa 19% • Loan/deposits ratio of 1.3x• Borrowed funds 27% of total assets• Further sector reforms

in the region• Broad money y-o-y growth reduced to 28.2% by July 2008• Full currency convertibility since 1997• Stable currency and managed float

Strong capital inflows• Net FDI 19.8% of GDP in 2007 • Portfolio investment inflows

Expanding economic base• Radical deregulation & liberalisation since 2004

Positive external momentum• Total public debt as % of GDP reduced from 56% in 2003 to 23% in 2007External public debt as % of GDP reduced f 38% i 2003 t 15% i 2007 • Moderate banking and private sector

borrowing• Net remittances 7.4% of GDP in 2007

since 2004• Entrepreneurial boom, with over 50,000 new business registered p.a. • Pronounced shrinkage of grey economy & corruption since 2004• Export diversification and growth (‘03-‘07 CAGR of 26%)

from 38% in 2003 to 15% in 2007 • FX reserves increased from US$191 mln in 2003 to US$1,446 mln in July 2008• Successful debut 5-year 7.5% RegS Eurobond of US$500 mln issued in April 2008


Radical reforms created a favourable market environment…

Economic Freedom Index, 2007Ease of Doing Business, 2008

1210

5

EstoniaUK

USA

1817

63

GEORGIAEstonia

UkUSA

(U f 35 i 2007)

7468

6459

4843

3832

12

T kRomania

ItanlyBulgaria

FranceHungary

LatviaGEORGIA

Estonia

8171

5748

4639

2218

MontenegroKazakhstan

TurkeyRomaniaBulgariaArmenia

LatviaGEORGIA (Up from 35 in 2007)

(Up from 44 in 2006)

134133

10776

74

RussiaUkraine

AzerbaijanKazakhstan

Turkey

139110

10696

86

UkraineBelarusRussia

AzerbaijanSerbia

g

Source: World Bank, 2008 (Rank out of 178 countries) Source: The Heritage Foundation

3821

22

45Voice and Accountability

Georgia Former Soviet Union Income level peers

Corruption Perception Index, 2007

(Percentile ranks)

847979

64

MontenegroSerbia

GEORGIATurkey

Worldwide Government Indicator, 2007

(Up from 99 in 2006)

38

34

38

39

20

28

26

27

33

44

51

22

Rule of Law

Regulatory Quality

Government Effectiveness

Political Stability/No Violence

143118

111105

9984

RussiaUkraineMoldovaAlbania

ArmeniaFYR Macedonia

38

38

22

20

45Corruption

ule o aw

Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Higher values indicate better governance ratingsSource: World Bank

Source: Transparency International; 178 countries ranked

150150150

AzerbaijanBelarus

Kazakhstan


Source: World Bank

…and provided the platform for high economic growth…

11 1%12.4% 14%12

GDPNominal GDP (US$bn) Real GDP growth, y-o-y (%)

7 810.2

11.1%

5.9%

9.6% 9.4% 9.3%

4%

6%

8%

10%

12%

4

6

8

10

4.0 5.1 6.47.8

2.70%

2%

4%

0

2

4

2003 2004 2005 2006 2007 Q1 2008Source: Department of Statistics of Georgia

Components of nominal GDP, 2007 Comments

Boosted by aggressive economic reforms and substantial FDIinflows, Georgia’s economy continues to show strong growth

Rapid economic growth has been driven by

Agriculture, 9.4% Manufacturing,

8.4%

C t ti Other, 29.2%

• A burst of entrepreneurial activity• Growth in domestic consumption led by a new middle class

• Rehabilitation of infrastructure, and• Exports

Georgia’s economic performance in 2006 and 2007 is

Construction, 6.7%

Trade, 13.1%Public

Administration,

Education & Healthcare,

7.4%

Georgia s economic performance in 2006 and 2007 isparticularly impressive, taking into consideration theconsecutive external shocks (Russian embargo, risingcommodity prices & subprime meltdown) and tight monetarypolicy

Source: Department of Statistics of Georgia

Nominal GDP = US$10,175 mln

Transport & Communications,

10.7%

Financial Intermediation,

2.2%

12.8%


…that is improving living standards and providing economic diversification

Nominal GDP per capita (LHS)Consumer indebtedness per capita (RHS)

diversification

Nominal GDP per capita

(US$)

GDP per capita (PPP)

(US$)

5 000(US$)

9191,188

1,4841,764

2,315

60

90

120

150

180

1,000

1,500

2,000

2,500

2,656 2,9113,288

3,6424,176

2,000

3,000

4,000

5,000

0

30

60

0

500

2003 2004 2005 2006 2007

Source: International Monetary Fund

0

1,000

2003 2004 2005 2006 2007E

Source: Department of Statistics of Georgia , National Bank of Georgia

4,000

5,000

60%

Agriculture IndustryEnergy ConstructionTransport & Communications Financial IntermediationHealthcare

GDP per capita (PPP)Broad-based economic growth(US$)

200720052001200320032001

4,396 4,330 4,264 4,237 4,197 4,176

0

1,000

2,000

3,000

ia an ia ia ne ia

20%

40%

60%

Y re

al in

crea

se

-/N

A

/BB-

BBB+

/BBB

/BBB

BBB

Rom

ani

Kaza

khst

a

Bulg

ari

Russ

i

Ukr

ain

Geo

rgi

-20%

0%

2003 2004 2005 2006 2007

Y-o-

Y

Source: Department of Statistics of Georgia Source: International Monetary Fund

B+/B

B-

B1/B

B-/

Baa2

/BBB

+/B

Baa3

/BBB

+/

Baa2

/BBB

-/

Baa3

/BBB

-/B


Strong investment inflows from strategic and...Net FDI as % of GDP, ‘07

6.3%

19.8%

Ukraine

Georgia

Agriculture IndustryBP/BTC/SCP Banking Other Sectors Net FDI as % of GDP

Net FDI inflows FDI breakdown by origin

(US$ mln)2005 2006 2007

UK 29.6% UK 15.7% Czech Republic 13.2%A b ij 14 9% USA 15 3% N th l d 13 0%

2.8%

4.1%

4.4%

5.8%

6.3%

Hungary

Russia

Poland

Kazakhstan

8.3%9.4% 8.5%

13.9%

19.8%

9%

12%

15%

18%

21%

900 1,200 1,500 1,800 2,100 2,400

Other Sectors Net FDI as % of GDP

1,076

2,015

Source: National Bank of Georgia, International Monetary Fund

Azerbaijan 14.9% USA 15.3% Netherlands 13.0%Cyprus 10.6% Kazakhstan 12.8% British Virgin Islands 10.3%Russia 8.6% Turkey 10.9% Cyprus 8.1%Norway 5.3% Azerbaijan 6.5% Turkey 6.8%Italy 5.1% Norway 6.5% Kazakhstan 6.4%Turkey 4.8% British Virgin Islands 4.9% UK 6.2%Japan 3.7% Italy 4.0% USA 5.6%45%

54%

50%

60%

5

6

Cumulative Net FDI since 1996Cumulative Net FDI as % of GDP

0%

3%

6%

-300 600 900

2003 2004 2005 2006 2007

331483 542

Source: Department of Statistics of GeorgiaSource: Department of Statistics of Georgia

USA 3.3% Denmark 3.6% Denmark 5.5%France 3.2% Cyprus 3.4% Russia 4.3%Subtotal 89.1% Subtotal 83.6% Subtotal 79.4%Other 10.9% Other 16.4% Other 20.6%Total 100.0% Total 100.0% Total 100.0%

1 3 1.8 2.33.5

5.5

34% 36% 36%

10%

20%

30%

40%

1

2

3

4

US$

bn

Privatisation Selected strategic investors(US$ mln)

297

380400Source: Department of Statistics of Georgia

1.3 1.8

0%0

2003 2004 2005 2006 2007

500Cumulative Net FDI per capita

228266

100

200

300

258.8

438.0

200

300

400

500

US$

Source: Ministry of Economic Development of Georgia

24 38

0

100

2003 2004 2005 2006 2007 2008YTDSource: Department of Statistics of Georgia

73.9108.5 97.8

0

100

2003 2004 2005 2006 2007


Portfolio investors

DEBTEQUITY

• Up to 300 institutional investors invested in Georgian debt and equities in 2004-2008

LOCALLOCAL

EUROCLEAR etc

ONLY


…have comfortably financed most of the current account deficit

2,015 25%2,500CAD Net FDI CAD as % of GDP CAD + Net FDI, as % of GDP

Current account deficit(US$mln)

331 483 542

1,076

-1.1%

2 7%-2.5% -1.0%

1.0%

0%

5%

10%

15%

20%

0

500

1,000

1,500

2,000

-376-344 -701

-1,154-1,917

-9.4%-6.7%

-10.9%-14.9%

-18.9%

2.7%

-25%

-20%

-15%

-10%

-5%

-2 500

-2,000

-1,500

-1,000

-500

2003 2004 2005 2006 2007 -25%-2,500

Exports and imports*

5 8957,000

Imports Exports

2003 2004 2005 2006 2007

CAGR(‘03 ‘07) 33% CAGR(‘03 ‘07) 26%

(US$mln)

Source: National Bank of Georgia

1,8662,493

3,319

4,413

5,895

1 287 1,6442,183

2,5683,240

2 000

3,000

4,000

5,000

6,000CAGR(‘03-‘07): 33% CAGR(‘03-‘07): 26%

1,287 1,644

0

1,000

2,000

2003 2004 2005 2006 2007Source: National Bank of Georgia* Export & import of goods and services


Export & import of goods and services

Liberal Trade Regime Diversified Trade Structure

WTO member since 2000 Turkmenistan,

2%United Arab

Emirates 2%China, 1% United Arab

Emirates 4%Bulgaria, 4% Turkmenistan,

3%

Liberal Trade Regime, Diversified Trade Structure

Export structure* by country, 2007 Import structure* by country, 2007

Simplified customs regime since August 2006, new customs code became effective in 2007

EU, 22%

C d 6%

Bulgaria, 5%

Russia, 4%

Kazakhstan, 3%

2% Emirates, 2% Other, 3%

Uk i 11%

Azerbaijan, 7%

USA, 4%

China, 4%

Emirates, 4% 3%

Armenia, 1%

Kazakhstan, 1%

Other, 8%

No quantitative restrictions on trade

Zero tariff on the majority of goods

Turkey,14%

USA, 12%

Azerbaijan, 11%

Armenia, 9%

Ukraine, 8%

Canada, 6%

EU, 30%

Turkey, 14%

Russia, 11%

Ukraine, 11%

One of the two beneficiaries of the EU GSP+ Scheme in the CIS since 2006, granting local companies the right to export 7,200

11%

Ferrous Beverages, S i i &

Vessels & Aircraft 1%

y,

Oil & Gas Mechanical

Export structure* by product, 2007 Import structure* by product, 2007

Source: Department of Statistics of Georgia Source: Department of Statistics of Georgia

g p ,categories of goods duty-free

Share of EU in exports up to 22% from 17% in 2003

Ferrous Metals, 21%

Spirits & Vinegar,

12%

Ores, 6%Oil & Gas 4%

Sugar, 2%

Pharmaceuticals, 2%

Aircraft, 1%

Other, 24%Oil & Gas,

18% Equipment & Electrical

Machinery, 17%

Plastic, 3%

Sugar, 2%

Paper, 2% Other, 31%

In November 2007 Georgia entered into a free trade agreement with Turkey

Source: Department of Statistics of Georgia* Export & import of goods only

Ores, 6%

Vehicles, 6%

Gems & Precious

Stones, 6%Cement, 5%Equipment & Rail Cars, 5%

Fertilizers, 5%

Oil & Gas, 4%

Vehicles, 10%

Ferrous Metal Products, 8%Cereals, 4%

Pharmaceuticals, 3%

Ferrous Metals, 3%

Source: Department of Statistics of Georgia


Export & import of goods only Source: Department of Statistics of Georgia

Entrepreneurial activity has flourished…

New business registrations per year Number of registered businesses(Thousands) (Thousands)

5160

29 30

43

35

20

30

40

50

Source: Ministry of Finance Source: Ministry of Finance

0

10

2004 2005 2006 2007 2008YTD

Number of registered businesses per 100 adults Starting a business, 2008

555

616

117

USALatvia

GEORGIAEstonia

Time (days) Procedures (number)

99

88

66666

1813

2921

1413

1066

GermanyItanlyRussia

KazakhstanRomania

UKNetherlands

TurkeyUSA

Source: World Bank - Doing Business 2008 Source: World Bank report - Doing Business 2008

1211

10999

3023

2732

18

AzerbaijanHungaryUkraineBulgariaArmeniaGermany


…and the banking sector has provided significant credit growthg owt

Banking sector assets and ROA NPLs as % of total loans(US$mln)

Georgia’s banking sector represents only a moderate contingent liability

8%5%7,000

Banking sector assets ROA (%)

g yof the sovereign

Entirely private owned 1996

No restrictions on foreign ownership of

7.4%

6.2%

3.8%

4%

6%

2 473

4,316

5,7773.9%

1.9%

3.1%2.8%

1 9%

2%

3%

4%

2 000

3,000

4,000

5,000

6,000

foreign ownership of banks

Attracting increasing foreign investment –7 out of top 10 banks majority foreign owned

2.5% 2.6%

0%

2%

2003 2004 2005 2006 2007Source: National Bank of Georgia Source: National Bank of Georgia

623 885 1,406

2,4731.9% 1.9%

0.6%0%

1%

0

1,000

2,000

2003 2004 2005 2006 2007 2008YTD

Gross loans to GDP Funding structureforeign-owned

Well capitalised with average BIS capital adequacy ratio of 19%

G th h

92%75%73%69%63%

54%80%

100%

g g

1 3 30%1.3

Loans/Deposits (LHS)Borrowed funds as % of total assets (RHS)

Growth has moderated in 2008, with banking sector assets up 15.7% YTD, (in GEL) (Jan – May) to US$ 5,777 mln

54%46%42%41%

27%19%26%

18%15%

0%

20%

40%

60%

ica

tan

blic

ece

ary

ine

key

sia

and

'07

'06

rus

jan

nia

1.0

1.11.1

1.3

17.6%

17 5%20.2%

26.9%

20%

25%

1.0

1.1

1.2


Sout

h Af

ri

Kaza

khst

Czec

h Re

pub

Gre

e

Hun

ga

Ukr

ai

Turk

Rus

Pol a

Geo

rgia

Geo

rgia

Bela

r

Azer

baij

Arm

en


0.915.9%17.5%

10%

15%

0.8

0.9

2003 2004 2005 2006 2007


Monetary system

Exchange rate evolution (period average)National Bank of Georgia

Established in 1991, NBG is an autonomous public entity responsible for: 2 43

2.6US$ EUR

responsible for:• Implement monetary and foreign exchange policies• Deal foreign reserves • Act as the fiscal agent for the government

The main remit is to achieve and maintain price stability

2.15

1.911 81

2.432.38

2.26 2.232.29 2.28

2.0

2.2

2.4

p y

Moving to explicit inflation targeting in 2009, with annual average CPI target <10%

FSA & FMS established as independent agencies under the auspices of NBG

1.81 1.781.67

1.49

1.4

1.6

1.8

Monetary policy CPI (period-average)Since spring 2006, the NBG has raised interest rates several times in response to the inflation rate, which, in

0%

11%

2003 2004 2005 2006 2007 2008YTD

p , ,part, has resulted in the Lari appreciating against the U.S. Dollar

Cumulative increase of the main policy rate by 500bps to 12% since November 2007 8.2%

9.2% 9.2%

10.4%

7%

8%

9%

10%

In September 2006, the NBG introduced its own securities (certificates of deposit) that have become the main tool of monetary policy with respect to liquidity in the banking sector

NBG’s inflation target for 2008 is 8.0%Source: National Bank of Georgia

4.8%5.7%

4%

5%

6%

2003 2004 2005 2006 2007 2008YTD



From 2009, a fiscal surplus is required by law

40%4,000

Budget expenditure breakdown, 2007Impressive tax revenue performance

(US$mln) Revenue as % of GDPNon tax revenueTax revenue

Economic activities,

13%

Other, 31%

2,6293,21716.0%

23.1% 24.2%26.8%

29.3% 29.7%

20%

30%

2,000

3,000

,13%

Defence, 26%

Enviroment

Social Expenditures,

14%

32 110 162 212 287 3265821,008

1,3311,770

2,629

0%

10%

0

1,000

2003 2004 2005 2006 2007 2008F

Enviroment, 1%

Healthcare, 4%Culture, 3%

Education, 8%

%

Total Budget outlay: US$3.5 bn

S Mi i t f Fi Source: Ministry of Finance

2 4%200

Conventional deficit, commitment (IMF Standard)Conventional deficit as % of GDP

Budget deficit, 2003-2008F Comments

(US$mln) Elimination of some and reduction of the overall number of taxesFlat profit tax of 15%

Source: Ministry of Finance Source: Ministry of Finance

-62121

-115-236

-483 -506-1.5%

2.4%

-1.8%-2%

0%

2%

-200

0

200 pUnified personal income tax and social (payroll) tax at 25%, to be reduced to 15% by 2012Since 2004, the government has been highly effective in raising tax revenues and reducing the size of the shadow economyThe increase in spending in 2007 was mostly due to the defence sector related to NATO accession aspirations

-3.0%-4.8%

-3.5%

-8%

-6%

-4%

-600

-400

Source: Ministry of Finance

sector related to NATO accession aspirationsIn 2008, defence and security spending will remain a priority along with social and welfare spendingLaw amendment proposing to cap the budget expenditures as % of GDP to 29% in 2009, 27.5% in 2010 and 25% in 2011 and beyond has been submitted to parliament

2003 2004 2005 2006 2007 2008F


Source: Ministry of Finance

Georgia successfully priced its inaugural US$500mln 5 year international bond, setting an important benchmark for the country's non-sovereign sector g p y g

Key transaction termsKey transaction terms Transaction highlightsTransaction highlights■ On April 7, Georgia successfully priced its inaugural US$500 million 5-year international bond, setting an

important benchmark for the country’s non-sovereign sector ■ Georgia’s impressive credit story and the overall scarcity of sovereign external debt generated significant

investor interest as demonstrated by the well attended roadshow and the over 3x order book oversubscription

Issuer: GeorgiaRating: S&P: B+ / Fitch: BB-Issue currency: US$ (i.e. USD1.6 billion)

The roadshow included meetings and calls with over 55 investors in totalOf those investors engaged in the roadshow, approximately 90% provided orders for the transaction The order book was composed of extraordinarily high quality investors with a number of anchor orders (i.e. USD50 million or more) from Europe and the US The transaction reached its target size of US$500mm within only 2 hours of bookbuilding and with USD1.6 billion of total demand, the order book closed within 6 hours of announcement

■ The intra-day execution strategy after a series of investor meetings the prior week strategically minimized

Issue currency: US$Issue size: US$500 millionIssue format: Reg S onlySettlement date: April 15, 2008 (T+6)Maturity date: 15 –Apr-2013Coupon: 7.50%I i 100 00% execution risk

■ With over 100 international investors from 23 countries participating in the deal, Georgia’s benchmark offering achieved great distribution diversity and successfully introduced the country to approximately 85 new fixed-income investors

■ The issue size of USD500 million will ensure that the bond will qualify for inclusion in JPMorgan’s EM debt indices, which after the seasoning period will further increase the bond’s benchmark status

■ The significant oversubscription allowed for pricing at the very low end of initial guidance (i.e. 7.50%) and compares favourably to Gazprom’s (A3/BBB/BBB) recent benchmark as well as other recent debut sovereign Order analysis (US$ million)Order analysis (US$ million)

Issue price: 100.00%Yield: 7.500% (MS+398bps) Denominations: US$100,000Bookrunners: JPMorgan / UBS

offerings ■ After Russia, Ukraine, and Kazakhstan, Georgia is only the fourth sovereign from the CIS to issue an

international bond and the only sovereign borrower from the region this year■ Georgia’s transaction is the only debut deal in the emerging markets in 2008 and achieved the lowest coupon

of 7.50% out of all the debut emerging market sovereigns in the last 2 years■ The offering performed well in the after-market, trading up to 101.75% during the second day of trading

I t b l tiI t b l ti I t b tI t b t

648

500

600

700Order Size Number of orders

Investor by locationInvestor by location Investor by typeInvestor by type344

255

351

77200

300

400France,

4%Other, 12%

Denmark, 5%

Netherlands, 8%

Pension Funds , 3%Hedge Funds, 3%

Insurance, 10%

Banks 15%7722 4 3

0

100

0-20mln 20mln-50mln 50mln-100mln 100mln and above

UK, 48%

Germany , 7%

US offshore, 16%

Asset Managers, 69%

Banks, 15%


Georgia enjoys strategic energy independence

Energy supplyMap of Georgia’s pipelines

Oil pipelines• Baku-Tbilisi-Ceyhan (BTC)Baku Tbilisi Ceyhan (BTC)• Baku-Supsa

Natural gas pipelines• SCP Shah-Deniz• North-South• South-Caucasus

Electricity supply

Georgia become a net exporter of electricity for the first time in 2007

Energy consumption per unit of GDP(TOE/US$), 2007Gas price evolution in Georgia

time in 2007

While a net importer during the winter months, Georgia exports its excess capacity to Turkey etc during the summer

US$3 3 3 37 3 584

110

167

90

120

150

180

r 10

00 m

3

$

0.46 0.63 0.73 0.74 0.75

1.73 1.73 2.00 2.09

3.35 3.37 3.58

0

1

2

3

4

60 65 65

0

30

60

2003 2004 2005 2006 2007

Per

Latv

ia

Lith

huan

ia

Geo

rgia

Arm

enia

Esto

nia

Azer

baij

an

Bela

rus

Kaza

khst

an

Russ

ia

Uzb

ekis

tan

Ukr

aine

Turk

men

ista

n

Source: Ministry of Energy Source: Core International, USAID


y f gy ,

Looking ahead: our formula for success

“Compassionate Libertarianism”

Social programs now account 32% of the budget expenditures (up from 29% in 2007), but

Fiscal prudence …p

Broadly balanced budget in 2008 (on a fiscal, but not monetary basis)

Budget surplus becomes mandatory from 2009...

With the surplus and asset sale proceeds absorbed by the two sovereign funds we are establishing

Continued reduction of tax rates and abolition of taxation of financial instrumentsContinued reduction of tax rates and abolition of taxation of financial instruments

Budget Expenditures/GDP reduced in 2008 to circa 30% from 32% in 2007 and proposed to be cappedeventually at 25%

And tight monetary policy

Explicit inflation targeting from October 2008 with the target not exceeding 10%Explicit inflation targeting from October 2008, with the target not exceeding 10%

Four interest rate increases since November 2007, by cumulative 500 bps

July ‘08 y-o-y period-average CPI 10.4% (compared to 9.2% in 2007 and 9.2% in 2006)

Completion of privatisation and proactive engagement with investors

The Global Competitiveness of the Financial Services Sector Act

Free Industrial Zones

Further enhancement and streamlining of the AML regulations

FSA established as the independent mega-regulatorp g g

International Financial Companies & Qualified Investor Funds, no taxation of financial instruments – aninvestor-friendly jurisdiction

Stock exchange demutualisation & remote membership, securities quoted in any currency


Investor confidence remains high in 2008…

Notwithstanding the current conditions in the global financial markets, investor confidence in Georgia remains high, withYTD private capital inflows exceeding US$1 bn. Highlights include the following:

• On 10 January 2008, Bank of Georgia (LSE:BGEO), the largest universal bank in Georgia, announced that it hadsuccessfully placed a US$65 mln senior loan facility through Merrill Lynch. In February 2008, Bank of Georgiaannounced that it raised US$100 mln through a rights issue of GDRs with ING bank acting as the bookrunner. In June,the Bank announced a successful placement of US$110 mln two-year Loan Passthrough Notes arranged by JPMorgan

• In February 2008, TBC Bank raised a subordinated loan of US$10 mln. In March 2008, TBC Bank obtained a US$30 mlnline from BNP Paribas and a US$100 mln debt facility through Merrill Lynch

• In 2008, several new banking licenses were issued, with Halyk Bank, a group of European and Georgian investors andg y g p p gDhabi Group each obtaining a banking license

• In March 2008, Dhabi Group announced that Kor Bank, its wholly-owned newly-established Georgian bank, acquired a100% equity interest in Standard Bank, a top 10 Georgian bank, for GEL70 mln

• In January 2008, GRDC, a leading real estate developer, announced that it had successfully closed a US$105 mln equityprivate placement with several institutional investorsp p

• In February 2008 Caucasus Energy & Infrastructure (GSE:NRGY), the permanent-capital vehicle investing in energy andinfrastructure assets, announced that it had placed US$50 mln of new equity and was admitted to trading on theGeorgian Stock Exchange

• In February 2008, KazMunaiGas announced the purchase of the Batumi oil terminal assets and long-term lease of theBatumi port assetsatu po t assets

• In February 2008, EFES Breweries International acquired a 100% equity interest in Natakhtari Brewery

• In March 2008, Populi, the leading supermarket chain in Georgia, raised GEL5 mln through a rights issue

• In April 2008, Government of Georgia successfully completed the sale of 51% equity interest in Poti Sea Port to RAKInvestment Authority . The consideration was US$80 mln

• Privatisation transactions with aggregate committed proceeds exceeding US$380 mln were completed or announcedYTD 2008 (including the sale of 51% of Poti Sea Port)

• In April 2008, Georgia has successfully issued US$500 mln debut 5 year 7.5% RegS Eurobond


Recent Government Press Releases


THE GEORGIAN ECONOMY: TAKING CARE OF BUSINESS


THE GEORGIAN ECONOMY: TAKING CARE OF BUSINESS CONT’D


PRIVATISATION PROCEEDS REACHED HISTORIC MAXIMUM IN 1H 2008


M‐O‐M CPI IN JULY 2008 FELL BY 1.2%, Y‐O‐Y PERIOD‐END CPI CHANGE IN SINGLE DIGITS AGAIN


THE GEORGIAN ECONOMY DEMONSTRATES RESILIENCE UNDER EXTREME STRESS


THE GEORGIAN ECONOMY DEMONSTRATES RESILIENCE UNDER EXTREME STRESS CONT’D


ENTREPRENEURIAL ACTIVITY CONTINUOUS TO FLOURISH IN GEORGIA


DEPARTMENT OF STATISTICS OF GEORGIA RELEASES ADJUSTED FDI FIGURES FOR 2007


SOUND BUDGET REVENUE COLLECTION PERFORMANCE IN 1H 2008


Q1 2008 BALANCE OF PAYMENT RESULTS IN LINE WITH EXPECTATIONS


GEORGIAN ECONOMY CONTINUES RAPID GROWTH


GEORGIAN ECONOMY CONTINUES RAPID GROWTH, CONT’D


UNEMPLOYMENT RATE DECLINED IN GEORGIA IN 2007


Georgian Economy - Back in Business 080825

Documents

Transcript of Georgian Economy - Back in Business 080825