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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
GEORGIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
The president, Mikhail Saakashvili, will
continue to consolidate his authority in the
coming months and ensure that his allies
control the main levers of power. When the
late Zurab Zhvania was prime minister,
competition between the two politicians split
the government into two distinct groups, with
Mr. Saakashvili and his supporters in charge
of the security and military apparatus, and
Mr. Zhvania and his allies retaining overall
control of the economy. However,
Mr. Saakashvili has been in the ascendancy
since Mr. Zhvania's death in February 2005,
and Mr. Zhvania's supporters appear to have
resigned themselves to handling the more
technocratic aspects of government.
Nevertheless, there is still a danger that the
ruling elite could fragment, should the more
hardline elements in government become
more radical.
Georgia's most problematic relationship–that
with Russia–will dominate its foreign policy
agenda. Ties between the two countries will
remain strained because of Georgia's actions
in South Ossetia, which Russia considers to
fall within its sphere of influence. Relations
will come under further pressure owing to
Russia's ban on imports of Georgian wine
and mineral water, as well as Georgia's threat
to withdraw from the Commonwealth of
Independent States (CIS). Should Georgia do
so, it would bring into question the status of
peacekeeping troops that are currently
deployed in Abkhazia as part of a CIS
operation. Nevertheless, the extent of
Russia's leverage will be hampered by
increased US interest in Georgia.
Reform efforts will include legislative, financial
and energy sector changes, as well as
privatisation. Further fiscal consolidation-in
particular, strengthening revenue collection,
improving public expenditure policy, and
tackling corruption and smuggling-will also
be a priority. The government has made
considerable strides towards bolstering
revenue performance by means of a new
tax code, but it still faces daunting challenges
in eradicating corruption and reducing
smuggling. Progress in these areas is likely
to be sluggish, owing to the weak
enforcement of legislation, including the
inconsistent application of laws and
bankruptcy procedures.
Economic Performance
Growth will be boosted by the movement of
economic activity out of the shadow
economy, owing to government crackdowns
on smuggling, in conjunction with tax reform.
It is forecasted that real GDP growth will
slow from 9.3% in 2005 to 8.8% in 2006,
and to a more sustainable 6.4% in 2007.
The disruption of gas and electricity supplies
in late January 2006 is unlikely to affect
growth, as supplies were restored fairly
quickly. Nevertheless, the near-doubling in
the price of gas from the Russian gas
monopoly Gazprom may pose a downside
risk to economic growth in 2007.
An expansionary fiscal policy will contribute to
inflationary pressures, although much of the
additional spending will go on imported
goods in areas such as infrastructure
construction and defence, thereby limiting
demand pressures. Oil prices are expected to
rise sharply in 2006, but to fall moderately in
2007, restricting the inflationary impact of
high fuel prices to an extent. The nominal
strengthening of the lari in 2006-07 will also
curb imported inflation. Therefore expect a
forecasted fall in annual average consumer
price inflation, from 8.2% in 2005, to 6.7% in
2006 and to 5.7% in 2007.
Foreign-currency inflows, in the form of
workers' remittances and external aid, are
likely to remain high in 2006-07. The lari will
therefore continue to strengthen against the
US dollar in both nominal and real terms.
The Central Bank will attempt to sterilise
these foreign-currency inflows, but, given the
limited tools at its disposal, it will only partly
succeed. The average annual exchange rate
of Lari1.79:US$1 is expected this year,
followed by a rate of Lari1.76:US$1 in 2007.
Georgia has an insufficiently developed
industrial base, and the domestic economy is
not equipped to service the building of
pipelines or other infrastructure construction
projects. Capital imports and services related
to construction, transport and consulting will
therefore rise. Export revenue growth, which
was buoyed in 2005 by rising prices for
metals-Georgia's main export product-will
slow in 2006 as demand slows in leading
export markets. The current-account deficit
equivalent is expected to be 10.7% of GDP
this year, followed by a deficit equal to 8.5%
of GDP in 2007.*
* Information provided by the Georgian Stock Exchange
Key Information Contacts
National Securities Commission of Georgia www.nscg.gov.ge (under construction)
National Bank of Georgia www.nbg.gov.ge
Ministry of Finance of Georgia www.mof.ge
Georgian Central Securities Depository www.gcsd.ge (under construction)
Georgian Securities Industry Association www.gsia.ge (under construction)
Georgian Corporate Directors Association www.gcda.ge
2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Services
Industry
Private consumption
Public consumption
Agriculture
Gross fixed investment
Net exports of goods & services
26.7
70
60
66.8
55.1
50
18.2
40
30
26.3
20
10
12.6
0
-10
-20
-17.8
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