georgia economic outlook · 2016-05-09 · prudent fiscal policy, sustainable debt level. major...

April 2016

Georgia Economic Outlook

Government of Georgia www.gov.ge

Country at Glance

Resilient

Economic

Growth History

Favorable

Business

Environment

Strong

International

Ties

Strong

Governance

Record

“Globally, Georgia improved the most in the areas measured by

Doing Business over the past 12 years” – DB 2016

Tangible improvement in Corruption Perception Index over the

10 years – up by 82 places since 2005 (Transparency

International)

Association Agreement (AA), including Deep and

Comprehensive Free Trade Agreement (DCFTA) with the EU

since 2014

Visa Liberalization with the EU expected in 2016

Ongoing reforms under AA agenda

Above 5% average growth during the last 10 years

Around 5% projected average growth over the next years

Improved governance and rule of law

- WGI’s score “Regulatory Quality” improved from 35.7

(2004) to 79.3 (2014)

- WGI’s score “Rule of Law” improved from 31.1 (2004) to

64.4 (2014)

Government of Georgia www.gov.ge 2


Stable Sovereign Ratings N

ove

mb

er

13

, 20

15

Foreign Currency

• Long Term: BB-

• Short Term: B

Local Currency

• Long Term: BB-

• Short Term: B

Outlook: Stable A

pri

l 1, 2

01

6

Foreign Currency

• Long Term: BB-

• Short Term: B

Local Currency

• Long Term: BB-

•Country Ceiling: BB

Outlook: Stable

Mar

ch 1

2, 2

01

6

Foreign Currency

• Long Term: Ba3

• Short Term: Not-Prime

Local Currency

• Long Term: Ba3

• Short Term: Not-Prime

Outlook: Stable

Major Rating Strengths:

Government's debt burden remains

modest and fiscal performance under

control;

Long Term Growth potential

remains strong;

Banking system well capitalized and

liquid;

Regional competiveness.


Strong support from the international

community;

Strong commitment to economic and

structural reforms;

AA with EU, DCFTA- easier access

to EU market, which will boost

Georgia's attractiveness as an

investment location over the medium

to long term;

Georgia's business environment very

favorable with rating peers (easy of

doing business indicators);

Prudent fiscal policy, sustainable debt

level.


Regional logistics hub and transport corridor

between Europe and Asia;

Very strong banking sector (Banking sector

risk -Low);

High institutional strength relative to peers,

reflected in strong government indicators.

(Georgia has progress beyond its Soviet roots,

and has arguably advanced further towards

Western-style, independent institutions than

any other country in the post -Soviet space.);

High Worldwide Governance indicator (WGI)

scores and outperforms its peers;

Institutional capacity- and pro business

operating environment, government's relative

strong balance sheet and moderate debt

burden.

3


Fast-Growing Diversified Economy

GDP

Source:

Geostat

5.1% average growth rate from

2010

Around 5% average growth

rate expected over the next

years

GDP per capita has doubled

during last decade

Key Growth Drivers:

(Average growth since 2009)

Services 8.8%

Manufacturing 8.7%

Construction 7.4%

Components of GDP 2015P

Source:

Geostat

Industry,

16.5%

Trade, 16.6%

Public

Administrati

on, 9.3%

Services,

31.2%

Agriculture,

9.2%

Other ,

17.2%

6,571 7,287 8,006 8,526 9,214 9,566 10,018 10,719 11,487

6.2%

7.2%

6.4%

3.4%

4.6%

2.8% 3.0%

5.5% 5.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015P 2016F 2017F 2018F

GDP per capita PPP (LHS) Real GDP growth, y-o-y, % (RHS)

4


Solid Fiscal Performance

Fiscal Performance and Public Debt

Current Account Deficit

Source: National Bank of

Georgia

Source: Ministry of Finance

15.0%

20.0% 22.0%

11.0% 10.0%

13.0% 12.0%

6.0%

11.0% 12.0%

11.0% 10.0%

9.0% 9.0% 8.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

% o

f G

DP

CA deficit FDI

32.0%

25.5%

31.2%

41.0% 42.4%

36.5% 34.8% 34.7% 35.6%

41.5% 39.8% 38.9% 37.7%

-3.4% -0.8%

1.9%

6.7%

4.5%

0.9% 0.6% 1.1%

2.0% 1.1% 1.1% 1.3% 1.4%

-4%

-2%

0%

2%

4%

6%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Public Debt to Nominal GDP (%) Budget Deficit (GFSM 2001) to Nominal GDP (%)

Low Public Debt c.40% of GDP, well

below peers

External public debt enjoys low (1.94%)

average annual interest rate including

Eurobond, majority (70%) of loans have fixed

interest rate

Average contractual maturity of 22 years

Multilateral or bilateral account for majority

of external debt and is on highly concessional

terms

Current account deficit mainly driven by

large FDI inflows in the country

Tourism revenues has increasing trend

(2005-2015 increased 8 times), becoming an

important source of current account

improvement

5


Effective Monetary Policy

NEER = REER - Domestic Inflation

+ Foreign Inflation

2003-2015 3.0% = 2.0% - 5.5% + 6.5%

Forecast 2.5% = 1.5% - 3.0% + 4.0%

Long run nominal

appreciation

Source: NBG

Real effective exchange rate has appreciating trend Inflation is under control

Source: NBG

Due to productivity growth

differential Georgia has

appreciating REER trend

Low domestic inflation

Inflation targeting framework

with 3% long term inflation target

(effective from 2018)

Floating exchange rate

6

6% 5%

4% 3%

-6%

-1%

4%

9%

14%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Annual Inflation Inflation Target


Diversified Public Debt Structure

External Public Debt Service

Affordable Public Debt Stock and Very Low Interest

Rate on External Public Debt

External Debt of General Government and Public Sector

Domestic

21.5%

Multilateral

56.2%

Bilateral

13.1%

Eurobond

9.1%

External

78.5%

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

mln

.U

SD

Principal Interest Eurobond 2021

External Public Debt Currency Structure

USD

35%

EUR

16%

SDR

45%

Other

4%

Source: Ministry of

Finance

73%

24%

3%

General Government ($4,385

mln)

SOE's ($1,433 mln)

Central Bank ($219 mln)

7


Domestic Market Development

Increasing Treasury Securities Stock

Source: Ministry of

Finance 8

Public Debt Management Strategy Objectives

Ensure the transparency of government public debt management policy

Increase the share of domestic financing and develop the domestic market of government securities;

Attract international investors on the domestic market

IFIs started to issue GEL denominated bonds to develop capital market in Georgia

EBRD –GEL 50mln; IFC –GEL 30mln; ADB – GEL 100mln; BSTDB – GEL 45mln

EBRD and ADB plan next issuances

Easy entry and exit for international investors

No capital controls, no taxes on government and IFI papers

Links through Clearstream and number of commercial Global Custodians (Treasury Securities could be

purchased through StateStreet and Citibank in US, and via Clearstream in EU)

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015 2016F

in M

LN G

EL

6 month T-bills 12 month T-bills 2 year T-bonds 5 year T-bonds 10 year T-bonds


Strong External Sector

Source: NBG & Geostat

Gross International Reserves

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

mln

. USD

GIR 3 Months of Imports

100% of Short Term Debt 20% of Broad Money

Export Structure by Product 2015

[CATEGORY NAME];

[VALUE]% [CATEGORY

NAME]; [VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]% [CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

[CATEGORY NAME];

[VALUE]%

sufficient stock of FX reserves

according to various adequacy

indicators

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018*

Trade Balance Services Balance Factor Income

Current Transfers CAD

CAD Decomposition

Trade Balance

Source: NBG

Source: NBG

-5,000

-3,000

-1,000

1,000

3,000

5,000

7,000

9,000

11,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

mln

. USD

Export Import Trade Balance

9


EU

Duty Free access to 500 mln

market

CIS

US, Canada,

Japan,

DCFTA

FTA

GSP

Turkey FTA

FTA with EFTA –negotiations concluded FTA with China– negotiations launched

Export Structure by Country 2015

Up from 19% of 2011 MFN (since 2000)

EU, 29%

CIS (exc. Russia), 31%

Russia, 7%

US, 5%

Turkey, 8%

China, 6%

Other, 14%

Open Trade Policy

Import Structure by Country 2015

EU, 33%

CIS (exc. Russia), 17% Russia, 8%

US, 3%

Turkey, 17%

China, 8%

Other, 14%

10


Resilient Banking Sector

Stable Profitability Capital Adequacy Ratio well above regulatory minimum

Steadily Declining NPLs Banking System Assets Continue to Grow

Source: NBG

0.01

0.05 0.05

0.02 0.04 0.03 0.03

0.01

-0.01

0.01 0.03

0.01 0.02 0.03 0.02

0.05

0.17 0.17

0.07

0.18 0.19

0.14

0.02

-0.07

0.08

0.18

0.08

0.14 0.16

0.14

-10%

-5%

0%

5%

10%

15%

20%

25%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

*

Return on Assets Return on Equity

0

5

10

15

20

25

Dec

-02

Jul-

03

Feb

-04

Sep

-04

Ap

r-0

5

No

v-0

5

Jun

-06

Jan

-07

Au

g-0

7

Mar

-08

Oct

-08

May

-09

Dec

-09

Jul-

10

Feb

-11

Sep

-11

Ap

r-1

2

No

v-1

2

Jun

-13

Jan

-14

Au

g-1

4

Mar

-15

Oct

-15

%

Source: NBG Source: NBG

Source: NBG

8.3 7.8

5.4

4.0

3.1 3.1

2.7

0

1

2

3

4

5

6

7

8

9

Au

g-0

9

No

v-0

9

Feb

-10

May

-10

Au

g-1

0

No

v-1

0

Feb

-11

May

-11

Au

g-1

1

No

v-1

1

Feb

-12

May

-12

Au

g-1

2

No

v-1

2

Feb

-13

May

-13

Au

g-1

3

No

v-1

3

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

15%

27% 20%

27%

50%

66% 71%

23%

-6%

27% 20%

13% 20% 19% 22%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

11


Growing FDI Stock

450 1190 2015 1564 658 814 1117 912 942 1758 1351

7.0%

15.3%

19.8%

12.2%

6.1% 7.0% 7.7%

5.8% 5.8%

10.6% 9.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015P

mln

. USD

FDI Share in GDP

Attractive Investment Destination

2,832 2,657

2,224

1,930 1,911 1,911

1,420

1,054

0

500

1,000

1,500

2,000

2,500

3,000

Georgia Russia Turkey Bosnia and Herz.

Azerbaijan Armenia Ukraine Moldova

FDI per capita (current USD), 2014

Source: UNCTAD Stat Source: Geostat

Political stability

Business-friendly environment

Corruption-free public service

Increase of market size by FTAs

Low crime-rate

BITs with 32 countries

Member of ICSID Convention since 1992

Free capital repatriation

Competitive cost of labor

- Available young and skilled labor force

- Flexible labor legislation

Improved access to finance:

- Strong banking sector

- 2 large investment funds

Agriculture, 2% Industry, 10%

Energy, 7%

Construction, 10%

Transport and Communicatio

n, 44%

Hotels and Restaurants,

5%

Financial Sector, 14%

Other, 8%

FDI by Sector, 2015 (%)

12


Business Environment in Numbers

Doing Business 2016

83

63

55

51

35

24

22

20

16

3

2

1

Georgia …

Ukraine

Azerbaijan

Turkey

Russia

Armenia

Georgia

Latvia

Lithuania

Estonia

Denmark

New …

Singapure

UP FROM #112 IN 2005

Index of Economic Freedom, 2015

Source: World Bank

46.9

49.8

52.1

57.5

61.0

63.2

67.1

69.7

73.0

74.7

76.8

82.1

89.4

89.6

Ukraine 162

Belarus 153

Russia 143

Moldova 111

Azerbaijan 85

Turkey 70

Armenia 52

Latvia 37

Georgia 22

Lithuania 15

Estonia 8

New Zealand 3

Singapure 2

Hong Kong 1 free

(100-80)

mostly unfree (59.9-50)

repressed (49.9-0)

mostly free (79.9-70)

moderately free (69.9-60)

UP FROM #99 IN 2005

Source: Heritage Foundation

130

66

50

48

40

32

10

10

3

2

1

Ukraine

Turkey

Croatia

Georgia

Latvia

Lithuania

Germany

UK

Sweden

Finland

Denmark

Corruption Perception Index, 2015

Source: Transparency International

UP FROM #130 IN 2005

Regulatory Quality, World Governance Indicators

(2014)

Source: World Bank

28.8

36.5

43.8

44.7

49.5

53.8

56.3

60.1

60.6

66.3

71.2

71.6

72.6

74.5

79.3

81.3

88.5

93.3

100.0

Ukraine

Russia

Azerbaijan

Kazakhstan

Bosnia & Herz.

Moldova

Serbia

Armenia

Albania

Turkey

Bulgaria

Romania

Italy

Hungary

Georgia

Czech Rep.

USA

Estonia

Singapore

UP FROM 33.3 IN 2005

13


Compelling Reforms Agenda

Structural

Reforms

Promoting

Open

Governance

Education

Reform Promoting

Transit Hub

14


Tax Reform

- Corporate income tax reform

- Enhancing easiness of tax compliance

Capital Market Reform

- Boosting stock exchange activities

- Development of local bond market

Pension Reform

- Introduction of private pension system

PPP reform

- Introduction of transparent and efficient PPP framework

Public Investment Management Framework

- Improved efficiency of state projects

Deposit Insurance

- Boosting private savings

- Enhancing trust to financial system

Accounting Reform

- Increased transparency and financial accountability

- Enhanced protection of shareholder rights

Association Agreement Agenda

Structural Reforms

15


Open Governance

Improvement of public services offered to the

private sector

- Creation of ”Front Office”

- Application of “Single Window Principle”

Involvement of the private sector in legislative

process

- Discussion of draft legislation at an early stage

Strict monitoring of implementation of

Government’ decisions

- Creation of a special unit for monitoring

purposes

16


Education

General Education Reform

- maximizing quality of teaching in secondary schools

Fundamental reform of Higher Education

- based on the comprehensive research of the labor

market needs

Improvement of Vocational Education

- increase involvement of the private sector in the

professional education

17


Transit Hub

Maritime

Anaklia deep water black sea port

- Strategic location

- Capable of accommodating Panamax type cargo

vessels

- High capacity – up to 100 mln. tons turnover

annually

- Up to USD 1 bln for first phase (out of 9) in Georgia

Rail

Baku-Tbilisi Kars new railroad line

Railway modernization project

Air

Tbilisi International Airport

- 2nd runaway to be

constructed

- International Cargo

terminal

Expansion of the South Caucasus Pipeline through Azerbaijan and Georgia

Additional USD 2 bln FDI in Georgia

16 billion cubic meters of new natural gas to Europe and Turkey.

Roads

Plan to finish all spinal projects by

2020 – East-West Highway, other

supporting infrastructure

Anaklia Deep

Sea Port

Shortest Root from China to

Georgia

18


Thank you for your

attention

19

georgia economic outlook · 2016-05-09 · prudent fiscal policy, sustainable debt level. major...

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