Georgia overview

June 2012 About Georgia

Area 69 700 sq. m. Population 4, 497, 600 Capital Tbilisi (population 1, 172, 700) Boarders: Southeast Azerbaijan, Southwest Turkey, North Russia, South Armenia Ethnic Groups: Georgians 83.8%, Azeris - 6.5%, Armenians 5.7%, Russians 1.5% Currency Georgian Lari (GEL); 1 USD= approximately 1.63 GEL (according to the data of 11.06.2012) Climate - The climate is dry and continental in eastern Georgia with hot summers and mild winters. The climate in western Georgia and on the Black Sea coast is warm and semitropical.

Economic Structure and Trends

In 2003-2011, Georgias gross national disposable income increased nearly 3 times, and so did its GDP per capita. Broad-based growth dynamics was sustained with average annual real growth rate of around 7%. Georgias projected 2012 level of the budget revenues - kept intentionally at around 30% of the GDP - is now very close to the level of GDP back in 2003. Number of taxes has been condensed drastically from 21 in 2004 to only 6 flat taxes today, with accompanying reduction of nearly all tax rates. Infrastructure spending increased almost 11 times. Georgia developed multi-modal maritime-air-land networks of cross-border and in-country connectivity to compound the virtues of the countrys geography. Public wealth spending on road, railway, energy, and municipal infrastructure went up dramatically, persistently amounting to up to 25-30 percent of annual expenditures. Current expenditure has been sufficiently contained, fostering a promising fiscal and public debt performance. 2011 net government debt to GDP ratio stood at only around 23%. Georgias

Nominal GDP (US$bln)

20.0 15.0 10.2 10.0 5.0 0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012P 2013F

17.9 14.4 12.8 10.8 7.8 11.6 15.9

4.0

5.1

6.4

Real GDP growth, y-o-y (%)

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%
11.1% 9.6% 9.4% 5.9% 2.3% 6.3% 7.0% 5.0% 6.5% 12.3%

-3.8% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012P 2013F

GDP Per Capita $US (PPP)

7000 6000 5000 4000 3000 2000 1000 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012P 2013F

Nominal GDP Structure 2011

Eurobond trades well above par in international capital markets. Significant flexibility of the labor market was warranted to provide comfort to private sector participants. Stability in the financial sector was ensured. No single bank has gone under despite global challenges. Banks are privately owned, well capitalized, with strong balance sheets, prudent loan book expansion patterns, high liquidity ratios and significant growth prospects. Georgia remains firmly committed to the trade openness, with free trade regime with almost all neighbors, including supreme of the CIS countries, South Caucasus, Central Asia and Turkey. Georgia will soon have deep and complete free trade agreement with the European Union and is exploring free trade deal with the United States of America.

Education, 4.5% Construction, 6.2%

Other sectors, 16.9%

Manufacturin g, 17.3%

Trade, 17.3%

Healthcare & Social Assistance, 6.1% Agriculture, 9.3% Transport&Co mmunication s, 10.6%

2011 outcomes: Tax collection increased 26% y-o-y VAT turnover increased 26% y-o-y Commercial bank lending to the real sector increased 24% y-o-y Trade turnover increased 36% y-o-y

Public Administratio n, 11.7%

Fiscal Framework
The Governments program of fiscal consolidation has advanced ahead of agenda with the deficit for 2012 declining to 3.6% of GDP. Improved compliance on the back of simplified procedures and policies has lifted tax receipts significantly. Government spending is more heavily weighted towards capital expenditure than among peers, with future positive multiplier effects. The Government is exceptionally prudent and conservative in managing recurrent and social costs, with growth-enhancing capital expenditures being the only contributor to the deficit formation. Fiscal consolidation thus does not pose any political or social challenges. The Government maintains strong relations with international development partners (both bilateral and multilateral), focusing in the first place on infrastructure development priorities. This provides low-cost fiscal stimulus to the economy and allows implementing competitiveness-enhancing capital expenditures measures. Retiring government debt stock and low and largely fixed interest rates help to reduce external vulnerabilities. Driven by solid essentials, Georgias Eurobonds have had a great secondary market performance, despite challenging global context. Strong and

unequivocal political consensus around the need to sustain fiscal stability and preserve adequate fiscal space precludes emergence of any policy drift in the area of fiscal programming or policy, with the Government fully in control of the spending dynamics.

Capital vs. Current Expenditures (high ratio of capex) 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2003 2005 2007 2009 2011

Current Expenditures

Capital Expenditures

Public debt stock peaked in 2010 at a comfortable 42% of GDP and is expected to decline over 2010-2013 (even under the most conservative scenarios the downward trend in this ratio shall be materialized). The public debt ratio decreased by 5.7 percentage points to 36.7% of GDP in 2011. Public debt stock is prevailingly on concessional terms - weighted average interest rate on the public external debt stock is 2% only. Interest payments to revenues ratio is very low relative to peers. Refinancing risk is inexistent.

Composition of the 2012 State Budget Outlays

Other, 19.5% Health Care, 5.4% Education, 8.4%

Social Protection, 20.9% Economic Affairs, 13.7%

Defence, 8.8% Public Order and Security, 11.5%

General Public Services, 11.8%

External Sector
The current account deficit has narrowed significantly and is expected to continue to tighten steadily to 6.7% of GDP by 2017 (IMF Precautionary Arrangement, April 2012) The current account deficit is already significantly narrower than that of some peers rated in the BB category Over 2009-11 FDI has covered an average of about 60% of the current account deficit; this is expected to rise further in 2012 FDI stimulates imports of goods, if FDI fell so would the current account deficit More generally, declining reliance on foreign capital is expected on the back of increased domestic savings as Georgias strong growth promotes continued wealth accumulation Strong and rising FDI bodes well for future productive capacity gains and exports and therefore for the structural reduction in the current account deficit over time Key industries benefiting from FDI include tourism, energy and manufacturing. The prospects for electricity exports are strongnet electricity exports have risen 12-fold since 2007 and the goal is to

double that again by 2015. Georgia has strong untapped hydroelectric potential with only 18% of potential production capacity utilized Concessional support, principally via the USD 4.5 bn Brussels Pledge, is a reliable source of financing for the current account deficit (and one of the factors behind the genesis of CAD). Concessional lending earmarked for competitiveness- and growth-enhancing infrastructure projects and the private sector funding by IFIs also stimulates imports, but will over time support stronger economic growth and exports, reducing the current account deficit. FX reserves are at all-time high, in excess of 4 months of imports, and rising; this together with the floating exchange rate gives Georgia flexibility to weather shocks.
Foreign Visitors (Thousand persons)
3500 3000 2500 2000 1500 1000 500 0 2006 2007 2008 2009 2010 2011 2012 0 2006 2007 2008 2009 2010 2011 2012P 780 1,052 1,333 1,500 2,032 2,812 1500 1,142 1000 587 500 768 1,039 1,431 1,183 3,249 2000 1,524

Current Transfers (Mln US$)

Gross International Reserves (Mln US$)

3000 2500 2000 1500 1000 500 0 2006 2007 2008 2009 2010 2011 May12 0 2007 1500 1000 500 2500 2000

Exports (Mln US$)

2008

2009

2010

2011

Apr-12

Business Climate And Sectors Georgian government has implemented important reforms since 2004 to offer a Liberal Tax System and a Business-Friendly Environment to potential investors. The success of Georgia proactive reform agenda is mirrored in the rankings in international business surveys. Georgia is consistently improving its position in all major international indices that evaluate business climate reform.
Georgia has 3 Free Industrial Zones that offer incentives and opportunities to process, produce and export goods with a minimal tax burden. Businesses can export goods free of trade barriers to global markets of more than 500 million consumers. The government established also 2 Free Touristic Zone offering investors unprecedented terms for the construction of hotels along the seaside that has the best climate conditions. Investment in the Tourism industry has grown substantially since 2004.

Agriculture in Georgia has been one of the greatest beneficiaries of reforms since 2004, particularly in the areas of land reform, ownership rights and tax reform. Georgian agriculture is in a period of transformation, which creates a vast number of investment opportunities. Agricultural firms pay no VAT, no profit tax and no import duties on equipment. Besides, agriculture has benefited tremendously from liberal Trade Regimes, such as the FTA & GSP+ agreements with Georgia s main trading partners. In Georgia, electricity generation is going through a transformation to Clean & Green Energy production. As part of this transformation, private and public investment has been made to fully rehabilitate key infrastructure components. Similarly, recent legislation has deregulated and unbundled energy services, which has stimulated further investments in generation, transmission and distribution. Georgia is a net exporter of electricity, and current public and private investments are pushing this market to achieve expand further. In Turkey, electricity consumption is increasing at a dramatic pace, requiring its domestic energy sector to double its capacity by 2020.

Georgias Telecommunications industry has recently experienced robust growth and expansion of the market with introduction of the latest ITC technologies. Telecommunications is one of the fastest developing industries in Georgia. Since the beginning of 2008, the number of Tbilisi residents who use the internet has doubled.

Sources: 1) National Bank of Georgia www.nbg.ge 2) National Statistics Office of Georgia www.geostat.ge 3) Ministry of Finance of Georgia www.mof.gov.ge 4) Ministry of Economic and Sustainable Development - www.economy.gov.ge

This document is a brief sample.