Ministry of Economic Development of Georgia

Economic Developments in Georgia:
New Investment Destination
Presentation for theJapan-Georgia Joint Economic Committee
TokyoMarch 7, 20071

Ministryof EconomicDevelopmentof Georgia
Georgia:
World’sNo1 Reformer•••••

The World Bank’s Doing Business in 2007 – N1 reformer in theworld in improving the ease of doing business.
The country leaped forward an unprecedented 75 places, moving from112th to 37th place out of 175 countries surveyed.
The Business Environment and Enterprise Performance Survey(BEEPS) - largest reduction in corruption among all transition
countries in 2002-2005.
Heritage Foundation’s Index of Economic Freedom for 2007,
Georgia ranked 35th out of 161 countries (20th out of 41 counties in theEuropean Region).
Georgia scored above world average in 7 out of 10 indicators, withparticularly high ratings in business freedom, fiscal freedom, freedom
from government, and labor freedom.
2

Ministry of Economic Development of Georgia

World’s No1
Reformer

Economy1. Georgia
2. Romania
3. Mexico
4. China
5. Peru
6. France
7. Croatia
8. Guatemala
9. Ghana
10. Tanzania

Starting abusiness

Dealing
Employing Registering Getting Protecting Payingwithworkers
propertycredit investors taxes
licenses

Trading
Enforcing Closing aacrosscontracts businessborders

3Low Taxes

Ministry of Economic Development of Georgia•In 2005, Georgia enacted a new Tax CodeThe total number of taxes reduced from 21 to only 7
Personal income tax 12% - flat rate.
Corporate profits tax - 20%.
Value Added Tax - 18%.
Social tax - 20% of monthly payroll
Ge orgia ha s Low est Tota l Tax Ra te in the Re gion
World Bank Indicator: Tota l Tax Ra te (% of Profit)
80%
70%
60%
50%
40%
30%
20%

Source: World Bank Doing Business in 2007.

UkraineRussiaM
oldova7countries

Averagefor

Kazakhstan

Azerbaijan

Armenia0%

Bulgaria

10%
Georgia

––––

4

Most
LiberalLabor CodeMinistryof Economic
Developmentof Georgia•••

Georgia's new Labor Code has been hailed as
one of the world’s best.
The Heritage Foundation ranks Georgia first in
the world in the Labor Freedom category of theIndex of Economic Freedom.
World Bank ranks Georgia sixth in the world on
the Employing Workers indicator of its Doing
Business Survey.
5Simplified
Licensingand Permitting
Ministryof Economic
Developmentof Georgia
Procedures••••

The total number of licenses and permits was reduced by84%
Reform eliminated 756 licenses and permits and streamlined
procedures.
Reduced statutory time limits for government action: 30 days
for issuing licenses and 20 days for issuing permits.
“Silence is consent” – a permit or license is automaticallygranted if no government action is taken within statutory timelimits.

6Corruption-Free
Environment
Ministry of Economic Development of Georgia•The World Bank hails Georgia as the top anticorruption performer inits 2006 "Anticorruption in Transition-3" (ACT3) report7Aggressive Privatization Policy

Ministry of Economic Development of Georgia

Privatization
300272Flexibility – Use of Various
Methods of Sale
Transparency and Fairness– Equal Opportunities for
all Potential Buyers
Investor-initiatedprivatization:

250
U S D M illio n



225

200
150
100
48

50
1325222002

2003

302000

2001

2004

2005

2006

8

GeographicLocation
MinistryStrategicof Economic
Developmentof Georgia•Located at the crossroads of Europe and Central Asia, Georgia is abridge connecting several important economic regions.

•Oil and Gas Pipelines: Georgia plays an important role as a strategic
crossroad for hydrocarbon transit in the Caspian region.
–––

The Baku-Tbilisi- Ceyhan (BTC) pipeline (3.7billion USD)The South Caucasus gas Pipeline (SCP) – (1.5 billion USD)
The Western Route Export Pipeline (WREP), also known as theBaku-Supsa pipeline (650 million USD)

9

Russia

Georgia
On the World Transit Map

Ministry of Economic Development of Georgia

UkraineKazakhstan

ΣTengiz

CPC

Isobilnoe
Novorossiysk

NREPUzbekistan

JugbaBlue StreamAnkaraSupsaSamsun

WREPSCPTbilisi

Armenia

Erzurum

TurkeyAktau

Georgia

Baku

Azerbaijan

Turkmenistan
Turkmenbashi

BTCCeyhan

Cyprus

Syria

Iraq

IranGeographic
Location
MinistryStrategicof Economic
Developmentof Georgia
Transport Links––––Georgian Railway, one of the
crucial links in Eurasian transit,
serves as a short-cut between
Europe and Central Asia
The Black Sea ports of Poti andBatumi are key links in theTRACECA (Transportation
Corridor – Europe, Caucasus,Asia) trade route.
Road Transport
Civil Aviation in Georgia took a
big leap forward with the February
2007 opening of a newinternational terminal in Tbilisi

Volume of Total Transit (excluding oil and gas)
25000

23,39920,88420,07020000
17,279

In 1000 T o n s•

15000

16,00816,251

2001

2002

13,474
10,325

10000

5000

0

1999

2000

2003

2004

2005

2006

11

Macroeconomic
stability - Growth
Ministryof Economic Developmentof Georgia• Average Growth Rate (lastfive years) – 7.4 percent

GDP growth rates in Georgia, 1996-2005

12

11.2

11.1

10.6

Impact of the Russian
Financial Crisis

10• Contribution from exports
nearly doubled over the last
five years• Financial intermediation,
construction,communications, transportand hotel/restaurant services
all have recorded on average
double-digit growth

9.68.1

8% 64.84

5.9

5.432.9

1.9

201996 1997 1998

1999 2000 2001 2002 2003

2004 2005 2006*

Financial intermediation
Construction
Communications
Transport
Restaurant and hotel services
Average (97-05)

Real Estate

2005

Trade and repair services
Electricity, Gas and Water
Manufacturing
Healthcare and social services
Education
Agriculture
010203040506012

Inflation
Ministry of Economic
Development of Georgia•Except for short episodesof sudden outbursts
inflation in Georgia has
been low (in single digits)
and stable for nearly adecade

Achieving Disinflation was amajor challenge of early transition
Annual CPI Inflation, 1996-2006 (%)
60

Major
Disinflation

RussianMonetaryExpansion

Crisis5040
External Shocks
3020

1013

Jul-06

Jan-06

Jul-05Jan-05Jul-04Jan-04

Jul-03Jan-03

Jul-02Jan-02

Jul-01

Jan-01

Jul-00

Jan-00Jul-99Jan-99Jul-98Jan-98

Jul-97

Jan-97

Jul-96

0Jan-96•Average annual CPI
inflation was 6.7 percent
during the last five years

Exchange Rate

Ministry of Economic DevelopmentofRateGeorgia
Real Effective Exchange• Since end-1998 Georgia
maintains managed float
exchange rate

(December 1995=100 index)
120.0

100.0

Jul-05Jan-05Jan-04
Jul-04

Jul-04

Jul-03Jan-04Jan-03

Jul-02Jan-02

Jul-01

Jan-01

Jul-00

Jan-00Jul-99Jan-99Jul-98Jan-98

Jul-97

Jan-97

Jul-9680.0
Jan-96• Nominal Exchange rate has
been fairly stable since the firsthalf of 1999 with an appreciation
bias since January 2004

Nominal GEL-USDExchange Rate, 1996-2005
Fixed Exchange Rate
Regime2.4000

The NBG is committed to the float,
however interventions happen:

Managed Float Exchange
Rate Regime

2.20002.00001.80001.60001.4000

14

Jul-06

Jan-06Jul-05

Jan-05Jul-03Jan-03

Jul-02Jan-02

Jul-01

Jan-01

Jul-00

Jan-00Jul-99Jan-99Jul-98Jan-98

Jul-97

Jan-97

Jul-961.2000Jan-96(1) To minimize excessive fluctuations
on both sides(2) To further build up FX reserves

Foreign Trade in 2001-2006
5000

Trade
MinistryDataof Economic Development of Georgia• 2006 - total trade turnover increasedby 39 %, reaching $4.7 billion USD• Exports increased by 15% andimports by 48%.

USD Million

4500
4000

Export3500

Import3000

3678

Trade Turnover

2500
2489

2000
1845

1500
1000

1141

500
318

865

7967533469936474610• Georgia’s trading partners - 132
countries.

2001

2002

2003

2004

2005

2006

2006 Foreign Trade Turnover by Region• MFN Tariffs with WTO Members• Preferential Tariffs with the USA,Canada, Switzerland and Japan• GSP Plus with the EU and Turkey:
export 7200 products to the 495
million EU market duty free.
•Free Trade with CIS Countries

Other
37%CIS
39%

EU24%

15

External
Ministry of Economic Development of Georgia
External Debt of Georgia (US$ Million), 1996-2009
Sector70%•Total external debt - US$ 1.7 2000
Billion at end 2005 - 27% ofGDP

Exteran Debt

External Debt/GDP(right scale)
60%

1600

50%

• External Debt to GDP ratio declining trend - below 20% by1200
2008

40%
30%

• More than 2/3rd of Georgia’s 800
external debt is concessional
debt owed to IFIs

20%

400

• In 2006 - non-concessional
debts at discount

10%

00%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200916

Remarkableincreasein FDI Flow
Ministryof Economic
Developmentof Georgia
FDI inflows and privatizatio Receipts 1996-2006 (US$ Million)• FDI sharp increase – reaching$1.1 billion In 2006

12001000

FDI• 2006 FDI share in GDP – 15%• Non oil and gas pipeline FDI
increase by 610%
• 2007 Estimate for FDI – $1.5billion

Privatization

80060040020001996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006*

In theofmedium-term
it is projected
Ministry
Economic Developmentof Georgia•GDP will grow on average by 7-8%
• Inflation will be maintained within the target level of5-6%• External debt to GDP will decrease to around 16%• Total banking assets to GDP will increase to 40% by200918

Georgia’sOpportunity
Sectors
forMinistryof EconomicDevelopmentof Georgia
Japanese Investments• Transport9Georgian Rail
9Port of Poti
• Poti Free Economic Zone
• Energy Sector• Banking19Georgian Railway and TRACECAMinistry of Economic Development of Georgia

Georgian Railway Freight Traffic
Ministry of Economic
Development of Georgia
2004-2006

Baku-Tbilisi-Kars new railway linking
Ministry of Economic Development of Georgia
Project

9 The project includes construction andrehabilitation services for the new 104,803 Km
railway formed by the Kars – Georgian bordersection which is about (75,848 Km) and theGeorgian Border – Akhalkalaki section which is(28,955 Km).
9 The new line annual capacity will be 15 million
tones.

Baku-Tbilisi-Kars new railway linking Project

Ministry of Economic Development of Georgia

annual capacity
15 million tones

Port of Poti

Ministry of Economic Development of Georgia• St. Petersburg

Rotterdam •Euro-Asian Routes• Gdansk• Hamburg• Bandar Abbas

Ministry of Economic Development ofGeorgia
3 No
5, 8EUROPE
EUROPE• Trieste
Barcelona •rtml h Rontu
on te–55%

CENTRALCENTRAL ASIAASIA• Marseilles

Constantza •CAUCASUSCAUCASUS

Varna ••
Istanbul
Piraeus •• Aktau•
PotiBaku •Silk Road
12,9 mln ton – 20%• Turkmenbashi• Bandar-e Amirabad

ut e 5 %o2R
th on –
uSo ln tm,316

commodities
Ministry principalof Economic Developmentof Georgia
ml.tons

Growth indicator 2000 - 2005

50403020
100
Grain

Timber &Woodproducts

Cotton &Textile

0.6

0.8

0.1

1.0

0.8

2.0

2.3

0.5

2.0

2.1

Oil & Oilproducts

Chemicals

2000

17.1

2005

42.8

Agriculturalproducts

Other

3.5

0.3

0.3

9.7

0.9

1.0

Food Stuff Metal, Ores

Ministryof Economic
Developmentof Georgia
Euro-AsianRoutes
Analysis
Transportation routes

Distance (km)Shipment time

North route
Central Asia – North Sea, (Hamburg)

4460,512 daysSouth route
Central Asia – Mediterranean Sea, (Marseilles)

5509,516 days

Silk Road
Central Asia – Black Sea East Cost

1940,57 days● most efficient Euro-Asian route;● potential turnover 25 ml.t to EU destination;● annual average grow 15 - 18 %;● growing containerized commodities;● future development ability.

Key point of above transshipment route considered Poti Sea Port

Port turnover

Ministry of Economic
Development of Georgia
6,686
6.000

6,127

6,124

7.000

4,859

5.000
4.000
3.000

9.
1%

1.000

0.
1%

26.0%

2.0000.000

Turnover (in thousand tons)
General / Bulk / Liquid Cargoes

126,897

140000106,458

12000010000080000

79,92760,59360000
40000
20000%

2006

19.2

2005

33.2%

2004

31.9%

2003

02003

2004

2005

2006

Handled Containers (TEU)

Poti Free Economic Zone

Ministry of Economic Development of Georgia

Poti Free Economic Zone

Ministry of Economic Development of Georgia

Poti Free Economic Zone

Ministry of Economic Development of Georgia• Total area 1150 hectares• Throughput
capacity
increase up to33 million tons
• Up to 1
million TEUs

Georgian Energy Sector

Ministry of Economic Development of Georgia• Ministry of Energy- policymaker• GNERC- regulator• GSE- technical operator• ESCO- commercial operatorof the power system

GeorgianEnergySector
Ministry of Economic Development of Georgia• Consumption• Local production– Hydro– Thermal- 8,3 bill. kWh- 8,5 bill kWh- 7,2 bill kWh- 1,3 bill kWh• Import- 0,5 bill kWh• Export- 0,7 bill kWh• Peak consumption- 1,700 MGW• Distribution companies-5• Medium and Large Hydros- 14• Thermal power plants-3

ELECTRICITY SECTOR STRUCTUREMinistry of Economic Development of Georgia• Vertically integrated energy companies arepermitted• Long-term direct bilateral contracts is allowed
among the participants• Reserve Market – Distribution Companies will be
required to hold guaranteed reserve capacities(10% of the peak capacity)• Third party access for Small Hydros is allowed• Export and Import of Electricity is deregulated• Small-sized Power Plants with less than 10 MWof installed capacity are deregulated

Projected Investments

Ministry of Economic Development of Georgia

The strategic interest of the Georgian energy sector is:• Development and utilization of own energy potential• Development of energy and power transmission
infrastructure: connecting Europe and Asia withEast-West and North-South Transmission Lines

PROJECTED LARGE-SCALE
Ministry of Economic Development of Georgia
CONSTRUCTIONS• Khudoni HPP– Installed capacity – 637 MW;– Average projected annual generation – 1,66 KWH;
– Required Capital Investment – USD 600 mln.

• Namakhvani Cascade of three HPPs
– Installed capacity – 450 MW;– Average projected annual generation – 1,6 KWH– Required Capital Investment – USD 585 mln.

MinistryPROJECTEDof Economic MEDIUM-SCALE
Development of Georgia

CONSTRUCTIONS (Small & Medium HPPs andWind Farms)• Cascade of Neskra HPPs (5 HPPs) – 87,3 MW• Cascade of Chelti HPPs (5 HPPs) – 13 MW• Cascade of Bakhvistskali HPPs (2 HPPs) – 22,3 MW• Cascade of Khrami HPPs (3 HPPs) – 125 MW• Cascade of Gubazeuli HPPs (4 HPPs) – 26,9 MW• Cascade of Chorokhi HPPs (2 HPPs) – 36,8 MW• Cascade of Rioni HPPs (2 HPPs) – 63,6 MW

MAP
OF SMALL& MEDIUM
Ministryof Economic
Developmentof Georgia
HPPsCASCADE OF NENSKRA HPPSORKHVI HPP

POTI HPP

MTSIRI HPPBAKHVI HPPKHELVACHAURI HPPKIRNATI HPPSAGLOLO HPPDARIALI HPP

ONI HPPMLETA HPP

ZONKARI HPPKVABLA HPP
NABEGLAVI HPPCHUKHCHUKHA HPPSHILDA HPPGUBAZEULI HPPTSIPNAGVARA HPPKHULO HPP

TSKNARI HPPSAMSHVILDO HPP
ARKHALO HPPDMANISI HPPABULI HPP

CHELTI HPPEurasian electricity connection

Ministry of Economic Development of Georgia• 2,5 GWh electricity per year (300 MW capacity)• 5 GWh (600 MW) on the second stage.
• 150 million USD, with back to back station system.
• Feasibility Study is being prepared by the USTDA• 330 (400) kv line connecting Georgia to Armenia• Synchronization of power systems of all neighboring countries

Systemof Georgia of Georgia
MinistryEnergyof Economic
Development

500KW
330KV

330KV

Ministry of Energy

Banking Sector

Ministry of Economic Development of Georgia
Share of Total Assets and Loans to GDP, 1996-2005• Financial Sector is one of themost dynamic sectors of theGeorgian economy today(average growth in assets was
34% during the last 10 years)

35.0%

Total Assets/GDPTotal Loans/GDP

30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1996

• 94 percent of the Financial
Sector is represented by banks

19971998

1999

2000

2001

20022003

2004

2005

Credit to the economy (% of GDP)

• There is no government
owned commercial bank inGeorgia

54

Baltics
39

CEE

38.6

Kazakhstan
Georgia

15

CIS-7

13.2
0

1020

30

40504160

2006*

Banking Sector

Number of Commercial Banks,
Ministry of Economic Developmentof1994-2006
Georgia•17 commercial banks - 15
domestic and 2 foreign bankbranches250

226200
150
101
10061

• 6 largest banks make up morethan 85% of the total banking
sector assets

53504337302927242119170
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Assets share of banks, 2006

• More than 50% of total banking
sector capital is owned by foreign
and international organizations• There are 10 banks with foreign
capital participation that
represents 76% of total assets

11 small banks,
12.6%
2 major banks
46.7%

4 mediumbanks, 40.7%

42

Banking
Ministry of Sector
Economic Development of Georgia
Profitability Ratios, 1996-2005

25.0
20.015.0• Profitability ratios are high byinternational standards with
ROA and ROE being 2.7% and15.7% in 2006, respectively•Interest rate spreads havebeen falling albeit still high

10.0
5.00.0
1996

1997

1998

1999

2000

2001

ROA

2002

2003

2004

2005

2006*

ROE

Lending and deposit rates, 2000-2006
30%
25%• The share of NPLs has been
on decline contributing to highprofitability

20%
15%
10%
5%0%

2000

2001

2002
Loans

2003
Deposits

2004

2005

2006

Spreads

43Banking
Ministry ofSector
Economic Development of Georgia
Factors driving credit boom

In 2005 Georgia witnessed the beginningof credit boom.
Is Georgia catching up?

• Massive legalization of theeconomy - firms and individuals better
able to demonstrate their creditworthiness

FACTSHEET for 2005 and 2006

• Macroeconomic stability, higher
economic activities and positive
economic outlook(average annual growth rates)• Increased competition – Newentrants (through takeovers), newmanagement teams• Rapidly Rising Real Estate

Prices

9 Total Assets up by 58 percent
9 Total Loans up by 68 percent
9 Total Deposits up by 44 percent
9 Equity Capital up by 58 percent
9 Net Profit up by 88 percent
9 Number of ATMs up by 153 percent
9 Number of cards up by 189 percent• Crowding-in – private lending
substituted by lending to the state as thegovernment ceased issuing treasury bills

44

TEN REASONS FOR JAPANESE INVETORS
Ministry of EconomicDevelopmentof Georgia
TO INVEST
IN GEORGIA
9World’s Number One Reformer
9Strategic Geographic Location
9Stable Macroeconomic Environment
9Competitive Trade Regimes
9Low Taxes
9Most Liberal Labor Code
9Simplified Licensing Procedures
9Aggressive Privatization
9Competitive Banking Sector
9Corruption-Free Environment
45

Ministry of Economic Development of Georgia

HOPE TO SEE YOU IN GEORGIA