FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
GEORGIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Georgia's president, Mikhail Saakashvili, may
consolidate his authority in the coming months
to ensure that his allies control the main levers
of power. When the late Zhurab Zhvania was
prime minister, competition between the two
politicians split the government into two
distinct groups, with Mr. Saakashvili and his
supporters controlling the security and military
apparatus, and Mr. Zhvania and his allies
retaining overall control of the economy.
A priority for the government in 2006 will be to
attempt to resolve the status of Abkhazia and
South Ossetia. The government will continue
to focus its attention on South Ossetia-which
is perceived as being a weaker entity than
Abkhazia. The self-declared leaders of South
Ossetia-as well as those of Abkhazia-will
probably be obstructive in whatever
negotiations take place, and are likely to turn
increasingly to Russia for support. Russia's
co-operation will be vital if Georgia is to reach
political accommodation with either of the two
republics. Russia will probably continue to
obstruct any resolution of the conflicts,
because the current situation helps it to
preserve a degree of influence in Georgian
affairs. However, the US is likely to place
increasing diplomatic pressure on Russia to
act in a more constructive manner towards
conflict settlement than has hitherto been the
case, which may allow at least some progress
over the forecast period.
In 2006-07 Georgian reform efforts will include
legislative, financial and energy sector reform;
privatization; and further fiscal
consolidation–in particular, the strengthening
of revenue collection, improving public
expenditure policy, and tackling corruption
and smuggling.
Monetary policy will be aimed at keeping
annual inflation under control and ensuring
that the local currency remains stable. Growth
in reserves and broad money will be adjusted
in order to achieve these twin goals, with the
National Bank of Georgia (NBG, the central
bank) relying on interventions in foreign
exchange markets and credit auctions in order
to sterilise hard-currency inflows.
Economic Performance
The privatization of several important industrial
enterprises in 2005 and into 2006 will result in
beneficial restructuring and investment,
providing a boost to economic growth.
In addition to an increase in privatization
revenue, a resurgence of interest in Georgia
from the US and international financial
institutions will pull in external financial
assistance, and this will be used to implement
economic reforms, build up Georgia's
deteriorating infrastructure and cover
budgetary spending. Real GDP growth will
accelerate from an estimated 8%
in 2005 to 10% in 2006, before slowing back
down to 8% in 2007.
In July 2005 the government took another
major step toward improving the business
climate by introduced a new licensing law.
Whereas more than 900 types of business
activities previously required a special license,
the new law has reduced this number to 159.
It is, however, far from certain whether this will
be enough to lure foreign investment in the
volumes needed to modernize dilapidated
productive assets, alleviate massive corporate
indebtedness, shed unnecessary workers and
fight entrenched interest groups. The energy,
telecommunications, manufacturing and
transport sectors are especially in need of
deep restructuring. The government expected
to sell the Tciatura Manganese Plant and the
Vartsikse hydropower plant to Evraz Holdings
(Russia), but in June the firm backed out.
An expansionary fiscal policy will contribute to
inflationary pressures, although much of the
additional spending will go on imported goods
in areas such as infrastructure construction
and defense, thereby limiting demand
pressures. Oil prices are expected to begin to
decline in 2006 and to fall more sharply in
2007, curtailing the inflationary impact of high
fuel prices. It is anticipated that annual
average consumer price inflation will fall to
7.8% in 2006 and 6% in 2007.
Foreign-currency inflows, in the form of
workers' remittances and external aid, are
likely to remain high in 2006-07. The lari will
therefore continue to strengthen against the
US dollar in both nominal and real terms.
An average annual exchange rate of Lari
1.79:US$ 1 is forecasted for 2006, followed by
a rate of Lari 1.76:US$ 1 in 2007.
Georgia has an insufficiently developed
industrial base and the domestic economy is
ill equipped to service pipeline projects and
other infrastructure construction. Capital
imports and services related to construction,
transport and consulting will therefore rise.
Export revenue growth, which was buoyed in
2005 by further rises in prices for
metals–Georgia's main export–will temper in
2006 as commodity prices fall and demand in
major export markets slows. Rising transit
revenue and workers' remittances will help to
reduce the current account deficit to 8.1% of
GDP in 2006 and 6.3% of GDP in 2007.
* Economist Intelligence Unit Ltd, June, 2005.
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
2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
Agriculture
Construction
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Industry
Private consumption
Gross fixed investment
Other
70
15.6
Public consumption
Net exports of goods & services
66.9
60
14.8
8.8
50
40
26.8
30
60.8
20
18.5
10
0
-10
-20
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