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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 GEORGIAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment Georgia's president, Mikhail Saakashvili, may consolidate his authority in the coming months to ensure that his allies control the main levers of power. When the late Zhurab Zhvania was prime minister, competition between the two politicians split the government into two distinct groups, with Mr. Saakashvili and his supporters controlling the security and military apparatus, and Mr. Zhvania and his allies retaining overall control of the economy. A priority for the government in 2006 will be to attempt to resolve the status of Abkhazia and South Ossetia. The government will continue to focus its attention on South Ossetia-which is perceived as being a weaker entity than Abkhazia. The self-declared leaders of South Ossetia-as well as those of Abkhazia-will probably be obstructive in whatever negotiations take place, and are likely to turn increasingly to Russia for support. Russia's co-operation will be vital if Georgia is to reach political accommodation with either of the two republics. Russia will probably continue to obstruct any resolution of the conflicts, because the current situation helps it to preserve a degree of influence in Georgian affairs. However, the US is likely to place increasing diplomatic pressure on Russia to act in a more constructive manner towards conflict settlement than has hitherto been the case, which may allow at least some progress over the forecast period. In 2006-07 Georgian reform efforts will include legislative, financial and energy sector reform; privatization; and further fiscal consolidation–in particular, the strengthening of revenue collection, improving public expenditure policy, and tackling corruption and smuggling. Monetary policy will be aimed at keeping annual inflation under control and ensuring that the local currency remains stable. Growth in reserves and broad money will be adjusted in order to achieve these twin goals, with the National Bank of Georgia (NBG, the central bank) relying on interventions in foreign exchange markets and credit auctions in order to sterilise hard-currency inflows. Economic Performance The privatization of several important industrial enterprises in 2005 and into 2006 will result in beneficial restructuring and investment, providing a boost to economic growth. In addition to an increase in privatization revenue, a resurgence of interest in Georgia from the US and international financial institutions will pull in external financial assistance, and this will be used to implement economic reforms, build up Georgia's deteriorating infrastructure and cover budgetary spending. Real GDP growth will accelerate from an estimated 8% in 2005 to 10% in 2006, before slowing back down to 8% in 2007. In July 2005 the government took another major step toward improving the business climate by introduced a new licensing law. Whereas more than 900 types of business activities previously required a special license, the new law has reduced this number to 159. It is, however, far from certain whether this will be enough to lure foreign investment in the volumes needed to modernize dilapidated productive assets, alleviate massive corporate indebtedness, shed unnecessary workers and fight entrenched interest groups. The energy, telecommunications, manufacturing and transport sectors are especially in need of deep restructuring. The government expected to sell the Tciatura Manganese Plant and the Vartsikse hydropower plant to Evraz Holdings (Russia), but in June the firm backed out. 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 defense, thereby limiting demand pressures. Oil prices are expected to begin to decline in 2006 and to fall more sharply in 2007, curtailing the inflationary impact of high fuel prices. It is anticipated that annual average consumer price inflation will fall to 7.8% in 2006 and 6% 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. An average annual exchange rate of Lari 1.79:US$ 1 is forecasted for 2006, followed by a rate of Lari 1.76:US$ 1 in 2007. Georgia has an insufficiently developed industrial base and the domestic economy is ill equipped to service pipeline projects and other infrastructure construction. Capital imports and services related to construction, transport and consulting will therefore rise. Export revenue growth, which was buoyed in 2005 by further rises in prices for metals–Georgia's main export–will temper in 2006 as commodity prices fall and demand in major export markets slows. Rising transit revenue and workers' remittances will help to reduce the current account deficit to 8.1% of GDP in 2006 and 6.3% of GDP in 2007. * Economist Intelligence Unit Ltd, June, 2005. Key Information Contacts Ministry of Finance of Georgia www.mof.ge National Securities Commission of Georgia www.nscg.gov.ge National Bank of Georgia www.nbg.gov.ge Georgian Central Securities Depository www.gcsd.ge Georgian Securities Industry Association www.gsia.ge 2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Agriculture Construction Industry Private consumption Public consumption Other Gross fixed investment Net exports of goods & services 14.8 15.6 8.8 70 60 50 40 66.9 60.8 30 20 10 18.5 26.8 0 -10 -20 -17.8 PAGE 74
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 GEORGIAN STOCK EXCHANGE GEORGIA ECONOMIC CHARTS AND TABLES 2001 2002 2003 2004 2005 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(b) 4.5(b) 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. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2004 2005 2006 2007 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 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 Source: Economist Intelligence Unit ViewsWire PAGE 75
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