economic developments in georgia: new investment destination · impact of the russian financial...

Ministry of Economic Development of Georgia

1

Economic Developments in Georgia: New Investment Destination

Presentation for the Japan-Georgia Joint Economic Committee

Tokyo March 7, 2007

Ministry of Economic Development of GeorgiaGeorgia: World’s No1 Reformer

2

• The World Bank’s Doing Business in 2007 – N1 reformer in the world in improving the ease of doing business.

• The country leaped forward an unprecedented 75 places, moving from 112th 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 the European Region).

• Georgia scored above world average in 7 out of 10 indicators, with particularly high ratings in business freedom, fiscal freedom, freedom from government, and labor freedom.


3

Economy Starting a business

Dealing with

licensesEmploying

workers Registering

property Getting credit

Protecting investors

Paying taxes

Trading across borders

Enforcing contracts

Closing a business

1. Georgia 2. Romania

3. Mexico 4. China 5. Peru

6. France

7. Croatia 8. Guatemala 9. Ghana 10. Tanzania

World’s No1 Reformer

Ministry of Economic Development of GeorgiaLow Taxes• In 2005, Georgia enacted a new Tax Code The 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

4

Georgia has Lowest Total Tax Rate in the RegionWorld Bank Indicator: Total Tax Rate (% of Profit)

80%

0%

10%

20%

30%

40%

50%

60%

70%

Geo

rgia

Bulga

ria

Arm

enia

Aze

rbaijan

Kaz

akhs

tan

Ave

rage

for

7 co

untries

Moldo

va

Rus

sia

Ukr

aine

Source: World Bank Doing Business in 2007.

Ministry of Economic Development of GeorgiaMost Liberal Labor Code

• 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 the Index of Economic Freedom.

• World Bank ranks Georgia sixth in the world on the Employing Workers indicator of its Doing Business Survey.

5

Ministry of Economic Development of GeorgiaSimplified Licensing and Permitting Procedures

• The total number of licenses and permits was reduced by 84%

• 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 automatically granted if no government action is taken within statutory time limits.

6

Ministry of Economic Development of GeorgiaCorruption-Free Environment

• The World Bank hails Georgia as the top anticorruption performer in its 2006 "Anticorruption in Transition-3" (ACT3) report

7

Ministry of Economic Development of GeorgiaAggressive Privatization Policy

Flexibility – Use of Various Methods of SaleTransparency and Fairness – Equal Opportunities for all Potential Buyers Investor-initiated privatization:

8

Privatization

133

25 22

48

225

272

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006U

SD M

illio

n


• Located at the crossroads of Europe and Central Asia, Georgia is a bridge 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 the

Baku-Supsa pipeline (650 million USD)

9

Strategic Geographic Location


Turkmenistan

Ukraine

Russia

Kazakhstan

Uzbekistan

Turkey

Georgia

SyriaIraqCyprus

AzerbaijanArmenia

Iran

TengizΣ

CPC

NREP

WREP

SCP

Erzurum

Isobilnoe

Blue Stream

Turkmenbashi

Aktau

Novorossiysk

BTC

Ceyhan

Tbilisi

Baku

Supsa

Jugba

SamsunAnkara

GeorgiaOn the World Transit Map


• 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 and Batumi are key links in the TRACECA (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 new international terminal in Tbilisi

11

Strategic Geographic Location

Volume of Total Transit (excluding oil and gas)

23,399

20,884

17,279

20,070

16,25116,008

13,474

10,325

0

5000

10000

15000

20000

25000

1999 2000 2001 2002 2003 2004 2005 2006

In 1

000

Tons

Ministry of Economic Development of GeorgiaGDP growth rates in Georgia, 1996-2005

11.210.6

2.9 31.9

4.85.4

11.1

5.9

9.6

8.1

0

2

4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

%

Impact of the Russian Financial Crisis

12

Macroeconomic stability - Growth• Average Growth Rate (last five years) – 7.4 percent

• Contribution from exports nearly doubled over the last five years

• Financial intermediation, construction, communications, transport and hotel/restaurant services all have recorded on average double-digit growth

0 10 20 30 40 50 60

Agriculture

Education

Healthcare and social services

Manufacturing

Electricity, Gas and Water

Trade and repair services

Real Estate

Restaurant and hotel services

Transport

Communications

Construction

Financial intermediation

Average (97-05)

2005


13

Achieving Disinflation was a major challenge of early transition

Annual CPI Inflation, 1996-2006 (%)

•Except for short episodes of sudden outbursts inflation in Georgia has been low (in single digits) and stable for nearly a decade

•Average annual CPI inflation was 6.7 percent during the last five years

0

10

20

30

40

50

60

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Major Disinflation

RussianCrisis

Monetary Expansion

External Shocks

Inflation


14

Exchange Rate• Since end-1998 Georgia maintains managed float exchange rate

• Nominal Exchange rate has been fairly stable since the first half of 1999 with an appreciation bias since January 2004

Real Effective Exchange Rate(December 1995=100 index)

80.0

100.0

120.0

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

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

(1) To minimize excessive fluctuations on both sides (2) To further build up FX reserves

Nominal GEL-USD Exchange Rate, 1996-2005

1.2000

1.4000

1.6000

1.8000

2.0000

2.2000

2.4000

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Fixed Exchange Rate Regime

Managed Float Exchange Rate Regime


15

Trade Data• 2006 - total trade turnover increased by 39 %, reaching $4.7 billion USD

• Exports increased by 15% and imports by 48%.

• Georgia’s trading partners - 132 countries.

• 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

Foreign Trade in 2001-2006

318 346 461647

865 993753 796

1141

1845

2489

3678

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2001 2002 2003 2004 2005 2006

USD

Mill

ion

Export

Import

Trade Turnover

2006 Foreign Trade Turnover by Region

Other37%

CIS39%

EU24%


0

400

800

1200

1600

2000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090%

10%

20%

30%

40%

50%

60%

70%Exteran Debt External Debt/GDP (right scale)

16

External Sector

•Total external debt - US$ 1.7 Billion at end 2005 - 27% of GDP

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

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

• In 2006 - non-concessionaldebts at discount

External Debt of Georgia (US$ Million), 1996-2009

Ministry of Economic Development of GeorgiaRemarkable increase in FDI FlowFDI inflows and privatizatio Receipts 1996-2006 (US$ Million)

0

200

400

600

800

1000

1200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

FDI

Privatization

• FDI sharp increase – reaching $1.1 billion In 2006

• 2006 FDI share in GDP – 15%

• Non oil and gas pipeline FDI increase by 610%

• 2007 Estimate for FDI – $1.5 billion


18

In the medium-term it is projected

•GDP will grow on average by 7-8%

• Inflation will be maintained within the target level of 5-6%

• External debt to GDP will decrease to around 16%

• Total banking assets to GDP will increase to 40% by 2009

Ministry of Economic Development of GeorgiaGeorgia’s Opportunity Sectors for Japanese Investments

• Transport

Georgian Rail

Port of Poti

• Poti Free Economic Zone

• Energy Sector

• Banking 19


Georgian Railway and TRACECAGeorgian Railway and TRACECA

Ministry of Economic Development of GeorgiaGeorgian Railway Freight Traffic2004-2006


The project includes construction and rehabilitation services for the new 104,803 Km railway formed by the Kars – Georgian border section which is about (75,848 Km) and the Georgian Border – Akhalkalaki section which is (28,955 Km).

The new line annual capacity will be 15 million tones.

Baku-Tbilisi-Kars new railway linking Project


annual capacity 15 million tones

Baku-Tbilisi-Kars new railway linking Project

Ministry of Economic Development of GeorgiaPort of PotiPort of Poti

Ministry of Economic Development of GeorgiaNorth Route

35,8 mln ton – 55%

South Route

16,3 mln ton – 25%

EUROPEEUROPE

CAUCASUSCAUCASUSBarcelona •

Varna •

• Hamburg• Bandar Abbas

• Bandar-e Amirabad

CENTRAL ASIACENTRAL ASIA

Baku ••Poti

• AktauConstantza •

• Marseilles

Silk Road12,9 mln ton – 20%

• GdanskRotterdam •

• St. Petersburg

• Turkmenbashi

Euro-Asian RoutesEuro-Asian Routes

•Istanbul

Piraeus •

• Trieste


0

10

20

30

40

50

2000 17.1 0.6 0.8 0.1 1.0 0.8 3.5 0.3 0.3

2005 42.8 2.0 2.3 0.5 2.0 2.1 9.7 0.9 1.0

Oil & Oil products Chemicals Grain

Timber & Wood

products

Cotton & Textile Food Stuff Metal, Ores

Agricultural products Other

Growth indicator 2000 Growth indicator 2000 -- 20052005ml.tons

principal commoditiesprincipal commodities

Ministry of Economic Development of GeorgiaEuro-Asian Routes AnalysisEuro-Asian Routes Analysis

Transportation routes Distance (km) Shipment time

North routeCentral Asia – North Sea, (Hamburg)

4460,5 12 days

South routeCentral Asia – Mediterranean Sea, (Marseilles)

5509,5 16 days

Silk RoadCentral Asia – Black Sea East Cost

1940,5 7 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.

● 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 Key point of above transshipment route considered PotiPoti Sea PortSea Port


60,593

79,927

106,458

126,897

0

20000

40000

60000

80000

100000

120000

140000

2003 2004 2005 2006

Turnover (iTurnover (inn thousand tonsthousand tons))General / Bulk / Liquid Cargoes

Handled Containers (TEU)Handled Containers (TEU)

0.000

1.000

2.000

3.000

4.000

5.000

6.000

7.000

2003 2004 2005 2006

Port turnoverPort turnover

4,859

6,124 6,1276,686

33.2%

31.9%

19.2%

0.1%

26.0% 9.1%

Ministry of Economic Development of GeorgiaPoti Free Economic Zone

Ministry of Economic Development of GeorgiaPoti Free Economic Zone

• Total area -

1150 hectares

• Throughput capacity increase up to 33 million tons

• Up to 1 million TEUs

Ministry of Economic Development of GeorgiaGeorgian Energy Sector• Ministry of Energy - policymaker

• GNERC - regulator

• GSE - technical operator

• ESCO - commercial operator of the power system

Ministry of Economic Development of GeorgiaGeorgian Energy Sector

• Consumption - 8,3 bill. kWh• Local production - 8,5 bill kWh

– Hydro - 7,2 bill kWh– Thermal - 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

Ministry of Economic Development of GeorgiaELECTRICITY SECTOR STRUCTURE

• Vertically integrated energy companies are permitted

• 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 MW

of installed capacity are deregulated

Ministry of Economic Development of GeorgiaProjected Investments

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 with East-West and North-South Transmission Lines

Ministry of Economic Development of GeorgiaPROJECTED LARGE-SCALE

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.

Ministry of Economic Development of GeorgiaPROJECTED MEDIUM-SCALE CONSTRUCTIONS (Small & Medium HPPs and

Wind 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


CASCADE OF NENSKRA HPPS

CHELTI HPPSHILDA HPPMTSIRI HPP

BAKHVI HPP

KVABLA HPP

GUBAZEULI HPP

DARIALI HPP

MLETA HPP

DMANISI HPPARKHALO HPP

SAMSHVILDO HPPTSKNARI HPP

POTI HPP

ONI HPP

ORKHVI HPP

KIRNATI HPPKHELVACHAURI HPP

KHULO HPP

ABULI HPP

ZONKARI HPP

CHUKHCHUKHA HPP

BAKHVI HPP

NABEGLAVI HPP

TSIPNAGVARA HPP

SAGLOLO HPP

ONI HPP

MAP OF SMALL & MEDIUM HPPs

Ministry of Economic Development of GeorgiaEurasian electricity connection

• 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


500KW

Energy System of GeorgiaEnergy System of Georgia

Ministry of Energy

330KV

330KV


41

Banking Sector

• Financial Sector is one of the most dynamic sectors of the Georgian economy today (average growth in assets was 34% during the last 10 years)

• 94 percent of the Financial Sector is represented by banks

• There is no government owned commercial bank in Georgia

13.2

15

38.6

39

54

0 10 20 30 40 50 60

CIS-7

Georgia

Kazakhstan

CEE

Baltics

Credit to the economy (% of GDP)

Share of Total Assets and Loans to GDP, 1996-2005

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Total Assets/GDP Total Loans/GDP


42

Banking Sector

•17 commercial banks - 15 domestic and 2 foreign bank branches

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

• 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

Assets share of banks, 2006

2 major banks46.7%

4 medium banks, 40.7%

11 small banks, 12.6%

226

101

6153 43 37 30 29 27 24 21 19 17

0

50

100

150

200

250

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

Number of Commercial Banks, 1994-2006


43

• Profitability ratios are high by international standards with ROA and ROE being 2.7% and 15.7% in 2006, respectively

•Interest rate spreads have been falling albeit still high

• The share of NPLs has been on decline contributing to high profitability

0.0

5.0

10.0

15.0

20.0

25.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Profitability Ratios, 1996-2005

ROA ROE

Lending and deposit rates, 2000-2006

0%

5%

10%

15%

20%

25%

30%

Loans Deposits Spreads

2000 2001 2002 2003 2004 2005 2006

Banking Sector


44

Banking Sector

Factors driving credit boom

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

• Macroeconomic stability, higher economic activities and positive economic outlook

• Increased competition – New entrants (through takeovers), new management teams

• Rapidly Rising Real Estate Prices

• Crowding-in – private lending substituted by lending to the state as the government ceased issuing treasury bills

In 2005 Georgia witnessed the beginning of credit boom.

Is Georgia catching up?

FACTSHEET for 2005 and 2006 (average annual growth rates)

Total Assets up by 58 percent Total Loans up by 68 percentTotal Deposits up by 44 percentEquity Capital up by 58 percentNet Profit up by 88 percentNumber of ATMs up by 153 percentNumber of cards up by 189 percent

Ministry of Economic Development of GeorgiaTEN REASONS FOR JAPANESE INVETORS

TO INVEST IN GEORGIA

World’s Number One Reformer Strategic Geographic LocationStable Macroeconomic EnvironmentCompetitive Trade RegimesLow Taxes Most Liberal Labor CodeSimplified Licensing ProceduresAggressive Privatization Competitive Banking SectorCorruption-Free Environment

45


HOPE TO SEE YOU IN GEORGIA

economic developments in georgia: new investment destination · impact of the russian financial...

Documents