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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 GEORGIAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment: Following the Soviet Union's dissolution, Georgia has faced a problematic and disruptive political and economic transition during which the public sector workforce was cut by almost half. Given this very difficult transition experience in the early years after independence, and uncertain prospects for regional economic and political stability, the turnaround in the Georgian economy after 1994 was remarkable. Despite a shock to the economy from widespread power outages in the first quarter, GDP growth for all of 2001 accelerated to 4.5%. One of the major factors accounting for slower growth in the past several years has been drought that has a significant effect in view of agriculture's 30% contribution to Georgian GDP. Georgia is to be on a major new energy corridor from the Caspian Sea to the Black Sea-the Baku-Ceyhan Pipeline from Azerbaijan to the Turkish Mediterranean port of Ceyhan, which began construction in the summer of 2002. It is already a key transit way for 'early oil' from Azerbaijan via the Baku-Supsa Pipeline that terminates at Georgia's Black Sea port of Supsa and commenced deliveries in 1999. Over the next several years, investment activities associated with 135 miles of the Baku- Ceyhan line will spur economic activity in Georgia (and temporarily higher current 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 ECONOMIC RATIOS Domestic savings PAGE 72 Georgia Lower-middle-income group Trade Indebtedness Investment account deficits). The country should benefit from its emerging role as a key transit point for huge flows of Caspian oil that are projected to move west over the next decade. In November 2003, opposition forces stormed the Georgian parliament and took over its control. President Eduard Shevardnadze declared a state of emergency but soon resigned from office. On Nov. 26, 2003, Mikhail Saakashvili announced his participation in the presidential election and went on to win the presidency in 2004. Economic Performance: GDP rose by and 4.5 and 5.4% in 2002 and 2001, respectively, despite power supply disruptions early in the year. Ending of the drought brought a sharp rebound in agricultural output that helped lift the growth rate. Services industries, especially transport, were also quite strong in 2001. Inflation, at 3.4% in 2001, was the lowest since independence. Tough anti-corruption legislation has already proved fruitful in driving the shadow economy down to 30% of GDP in 2003. Georgia's current account has been in persistent deficit in recent years. The current account deficit is smaller than the trade GROWTH OF INVESTMENT AND GDP (%) 80 60 40 20 0 -20 -40 -60 97 GDI GDP deficit because Georgia has surpluses in services (including net factor income payments) and in unilateral transfers (including non-loan foreign aid grants). In the capital and financial account, the transactions are dominated by official aid loans and by foreign direct investment, much of which has been, and will be in the next several years, associated with new oil pipeline construction. Over the past four years, Georgia has attracted as much as US$ 220 million in FDI (in 1998 when the Baku-Supsa pipeline was being built) and as little as US$ 62 million in 1999 in the aftermath of the Russian financial crisis. In 2001, the net inflow of FDI totaled US$ 100 million, but that is expected to more than double by 2004 when the Baku-Ceyhan pipeline investment will be peaking. Perhaps the most significant development in the region is the U.S.-backed $2.9 billion Baku- Tbilisi- Ceyhan (BTC) oil pipeline that originates in Baku, passes through the Republic of Georgia, and terminates at Ceyhan, Turkey. This will greatly accelerate energy sector growth going forward. 1 1 Economic and Political Overview, County Watch Incorporated, 2005 98 99 00 01 02 03 * World Bank reports
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 GEORGIAN STOCK EXCHANGE GEORGIA GDP/EMPLOYMENT BY SECTOR OF ORIGIN Sector % GDP % Employment Agriculture 32.0 8.6 Industry 23.0 31.4 Services 45.0 60.1 GEORGIA MONEY SUPPLY, INTEREST RATES AND FOREIGN EXCHANGE RESERVES GROWTH OF EXPORTS AND IMPORTS (%) 60 40 20 0 -20 EXPORT AND IMPORT LEVELS (US$ Millions) 1,600 1,200 800 400 0 97 98 99 00 01 02 03 INFLATION (%) Exports Imports GDP deflator CPI Exports 97 Imports 98 99 00 01 02 03 1998 1999 2000 2001 2002 Money Supply M1 (lari-billions) 0.25 0.28 0.37 0.39 0.45 Money Supply M2 (lari-billions) 0.37 0.45 0.62 0.74 0.87 Growth Rate M1 -10.0% 10.0% 33.7% 7.0% 14.9% Growth Rate M2 -1.1% 21.1% 39.4% 18.5% 17.9% Interest Rates deposit rate 17.0% 14.6% 10.2% 7.8% 9.8% lending rate 46.0% 33.4% 32.8% 27.3% 31.8% Foreign Exchange Reserves (US$ millions) 123 132 109 159 198 Exchange Rate Period Average (lari/US$) 1.3898 2.0245 1.9762 2.0730 2.1957 Annual % Growth 7.12 45.67 -2.39 4.90 5.92 20 16 12 8 4 0 CURRENT ACCOUNT BALANCE TO GDP (%) 0 -2 -4 -6 -8 -10 97 97 98 99 00 01 02 03 98 99 00 01 02 03 * Economic Overview, Country Watch Incorporated, 2005 * World Bank reports PAGE 73
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