FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
GEORGIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Political Outlook
President Mikheil Saakashvili’s failed attempt in
August 2008 to regain the breakaway province
of South Ossetia by force, which led to a brief
but damaging conflict with Russia, means that
there is a high risk that he will lose power.
Economic reform efforts will be tempered by the
need to make the reforms more palatable to the
population, in order to avoid a repeat of the
domestic turmoil of late 2007. GDP growth will
slow in 2008, owing to the disruptions caused
by the conflict, but is expected to recover
slightly in 2009. The current-account deficit will
remain above 20% of GDP in 2008-09.
Mikheil Saakashvili, who was re-elected
president in January 2008, is expected to face a
strong challenge to his leadership in 2008-09.
Mr Saakashvili’s failed attempt in August 2008
to regain the breakaway province of South
Ossetia by force, which led to a brief but
damaging conflict with Russia, will lead to
questioning of his decision-making by his
domestic political opponents. Bilateral relations
with Russia will dominate the Georgian foreign
policy agenda, but ties between the two
countries are unlikely to improve as long as Mr
Saakashvili–whom Russia wants tried as a war
criminal for his alleged actions in South
Ossetia–is in power. Georgia is highly unlikely
to lift its veto on Russian accession to the World
Trade Organization in 2008-09, and Russia in
return will maintain the economic blockade of
Georgia in place since late 2006.
Economic Performance
The Russian-Georgian war caused an inflow of
several thousand internally displaced persons
(IDPs) from the conflict areas, as well as
substantial damage to infrastructure. Public
funds, supplemented by a large amount of
foreign aid (a total of US$1.8 billion has been
pledged so far), will be used for providing
humanitarian assistance to the IDPs and for
rebuilding military and civilian infrastructure.
Once short-term emergency needs have been
fulfilled, economic policy will focus once more
on efforts to reform the legislative, financial,
energy and healthcare sectors. However, these
efforts will be tempered by the need to make
the reforms more palatable to the population, in
order to avoid a repeat of the domestic turmoil
seen in late 2007.
The full-year consolidated budget deficit on a
cash basis fell to 2.3% of GDP in 2007, from
2.8% in 2006, owing to a sharper rise in revenue
than in expenditure. Despite the greatly
increased demand for public expenditure
arising from population displacement and
damage to infrastructure during the war, the
Economist Intelligence Unit believes that the
large amount of foreign aid forthcoming from
the US, the IMF and possibly other multilateral
organizations will cover most of the additional
spending needs.
Therefore, the consolidated budget deficit
should only deteriorate modestly as a
proportion of GDP over 2008-09. Although
economic activity and capital flows look set to
slow in the remainder of 2008, supply
bottlenecks caused by the conflict, as well as
high global energy and food prices, make it
unlikely that the NBG will meet its inflation target
in 2008. Issuance of CDs and open-market
operations should gradually help the NBG to
absorb a greater amount of liquidity and will
eventually facilitate the adoption of inflation
targeting. Nevertheless, the development of
liquid domestic securities markets, which is
essential for the smooth conduct of monetary
policy, will take time, and tension is expected to
remain over 2008-09 between the competing
policy objectives of external competitiveness
and domestic stability.
Annual average consumer price inflation was
9.3% in 2007, a result of high food and energy
prices, as well as strong economic growth.
Inflation rose to around 11% year on year in
January-August 2008 and now it is expected to
average 11.3% for the whole of 2008 as supply
bottlenecks and disruptions to economic
activity combine with the lagged effect of
several quarters of strong economic growth to
keep inflation high. A moderation of economic
growth to below trend in the aftermath of the
conflict with Russia will push inflation down to
9.2% in 2009, a process that will be helped by a
moderation in global food and energy prices.
The lari’s exchange rate against the US dollar
has been stable at Lari1.41:US$1, owing in part
to market intervention by the central bank.
The current-account deficit reached around
21% of GDP in 2007, and will probably widen
even further to 24.6% of GDP in 2008. The trade
deficit is likely to widen markedly in 2008, as
export growth is constrained by short-term
damage to transport and shipment
infrastructure, and imports are boosted by high
energy prices, as well as by the reconstruction
and rehabilitation of damaged infrastructure.
This will be offset only slightly by a rise in the
transfer surplus as external aid pours in. In 2009
the trade deficit will rise less markedly as
exports recover and global energy prices fall,
allowing the current-account deficit as a share
of GDP to return to the 2007 level.*
*Info provided by EIU-October 2008
Key Information Contacts
Financial Monitoring Service of Georgia www.fms.gov.ge (under construction)
National Bank of Georgia www.nbg.gov.ge
Ministry of Finance of Georgia www.mof.ge
Georgian Central Securities Depository www.gcsd.ge (under construction)
Georgian Securities Industry Association www.gsia.ge (under construction)
Georgian Corporate Directors Association www.gcda.ge
2007-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
Services
Agriculture
58.2
Industry
Private consumption
Gross fixed investment
28.7
13.0
PAGE 66
2007-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
80
70
60
50
40
30
20
10
0
-10
-20
Public consumption
Net exports of goods & services
74.6
29.4
13.9
-17.9