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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.
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
• 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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of 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 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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
15
Trade Data• 2006 - total trade turnover increased by 39 %, reaching $4.7 billion USD
• Exports increased by 15% and imports by 48%.
• Georgia’s trading partners - 132 countries.
• MFN Tariffs with WTO Members
• Preferential Tariffs with the USA, Canada, Switzerland and Japan
• GSP Plus with the EU and Turkey: export 7200 products to the 495 million EU market duty free.
•Free Trade with CIS Countries
Foreign Trade in 2001-2006
318 346 461647
865 993753 796
1141
1845
2489
3678
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2001 2002 2003 2004 2005 2006
USD
Mill
ion
Export
Import
Trade Turnover
2006 Foreign Trade Turnover by Region
Other37%
CIS39%
EU24%
Ministry of Economic Development of Georgia
0
400
800
1200
1600
2000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090%
10%
20%
30%
40%
50%
60%
70%Exteran Debt External Debt/GDP (right scale)
16
External Sector
•Total external debt - US$ 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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
Georgian Railway and TRACECAGeorgian Railway and TRACECA
Ministry of Economic Development of GeorgiaGeorgian Railway Freight Traffic2004-2006
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
500KW
Energy System of GeorgiaEnergy System of Georgia
Ministry of Energy
330KV
330KV
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
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
Ministry of Economic Development of Georgia
HOPE TO SEE YOU IN GEORGIA
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