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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$1 in 2007. Georgia has an insufficiently developed industrial base, and the domestic economy is not equipped to service the building of pipelines or other infrastructure construction projects. Capital imports and services related to construction, transport and consulting will therefore rise. Export revenue growth, which was buoyed in 2005 by rising prices for metals-Georgia's main export product-will slow in 2006 as demand slows in leading export markets. The current-account deficit equivalent is expected to be 10.7% of GDP this year, followed by a deficit equal to 8.5% of GDP in 2007.* * Information provided by the Georgian Stock Exchange Key Information Contacts National Securities Commission of Georgia www.nscg.gov.ge (under construction) National Bank of Georgia www.nbg.gov.ge Ministry of Finance of Georgia www.mof.ge Georgian Central Securities Depository www.gcsd.ge (under construction) Georgian Securities Industry Association www.gsia.ge (under construction) Georgian Corporate Directors Association www.gcda.ge 2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Services Industry Private consumption Public consumption Agriculture Gross fixed investment Net exports of goods & services 26.7 70 60 66.8 55.1 50 18.2 40 30 26.3 20 10 12.6 0 -10 -20 -17.8 PAGE 72
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 GEORGIAN STOCK EXCHANGE GEORGIA ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP at market prices (Lari billions) 6.7 7.5 8.6 9.8 11.6 GDP (US$ billions) 3.2 3.4 4.0 5.1 6.4 Real GDP growth (%) 4.8 5.5 11.1 5.9 9.3 Consumer price inflation (av; %) 4.6 5.6 4.8 5.7 8.2 Population (millions) 4.7 4.6 4.6 4.5 4.5 Exports of goods (FOB) (US$ millions) 496.1 601.7 830.5 1,092.5 1,472.4 Imports of goods (FOB) (US$ millions) -1,045.6 -1,084.7 -1,466.7 -2,008.6 -2,686.3 Current-account balance (US$ millions) -211.7 -221.4 -374.8 -425.7 -750.7 Foreign-exchange reserves excl gold (US$ millions) 159.4 197.6 190.7 382.9 473.2 Exchange rate (av) Lari:US$ 2.07 2.20 2.15 1.92 1.81 (a) Actual ECONOMIC FORECAST SUMMARY 2004 (a) 2005 (b) 2006 (b) 2007 (b) Real GDP growth (%) 6.3 8.0 10.0 8.0 Consumer prices (% change) 5.7 8.2 7.6 5.8 Budget balance (% of GDP) -3.0 -2.7 -2.8 -2.4 Merchandise exports (US$ billions) 1.09 1.36 1.55 1.76 Exchange rate (Lari:US$1) 1.917 1.813 1.790 1.760 (b) The Economist Intelligence Unit Estimates 2005-PRINCIPAL EXPORTS (%) 2005-PRINCIPAL IMPORTS (%) Ferro alloys, copper & gold Oil, gas & electricity Automotives Ferrous waste & scrap, iron & steel Wine Other Tubes & pipes Other 13.3 9.7 9.4 17.1 67.6 72 7.2 3.7 2005-MAIN DESTINATION OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Russia Turkey Azerbaijan Turkmenistan Armenia Other Russia Turkey Azerbaijan Ukraine Germany Other 14.1 11.4 9.4 17.8 9.6 15.4 8.8 8.7 8.3 4.6 45.2 46.7 The Economic Intelligence Unit Ltd., July 2006 PAGE 73
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