Identifier
Created
Classification
Origin
07TBILISI652
2007-03-28 10:28:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tbilisi
Cable title:  

THE GEORGIAN ECONOMY LOOKS FORWARD TO A YEAR OF

Tags:  ECON PGOV GG 
pdf how-to read a cable
VZCZCXRO7497
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #0652/01 0871028
ZNR UUUUU ZZH
R 281028Z MAR 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 5843
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 03 TBILISI 000652 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/CARC AND EB/IFD/OMA
COMMERCE FOR 4231 DANICA STARKS
TREASURY FOR OIA

E.O. 12958: N/A
TAGS: ECON PGOV GG
SUBJECT: THE GEORGIAN ECONOMY LOOKS FORWARD TO A YEAR OF
GROWTH IN 2007


UNCLAS SECTION 01 OF 03 TBILISI 000652

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/CARC AND EB/IFD/OMA
COMMERCE FOR 4231 DANICA STARKS
TREASURY FOR OIA

E.O. 12958: N/A
TAGS: ECON PGOV GG
SUBJECT: THE GEORGIAN ECONOMY LOOKS FORWARD TO A YEAR OF
GROWTH IN 2007



1. (U) This telegram is sensitive but unclassified. Not for
Internet distribution.


2. (SBU) Summary: Georgia's economy overcame Russian
sanctions and grew 9.3 percent in 2006. Growth is expected
to continue at a 7-8 percent rate in 2007. Prospects for
increased foreign direct investment are good. Exports and
tourism receipts grew in 2006 and similar results in 2007,
along with investment, would help to keep the economy on
track despite a large trade deficit. The main threat to
macroeconomic stability is inflation, which reached 11
percent annualized in February 2007. However, the GOG has
promised the IMF to maintain fiscal discipline, reduce the
growth of the money supply and take a more relaxed approach
to the trend of appreciation of the lari. End Summary.

GROWTH DESPITE RUSSIAN SANCTIONS
--------------


3. (SBU) Georgia has entered 2007 with a realistic chance for
growth, macroeconomic stability, a stepped up pace of
investment and concomitant job creation -- if it can
implement the right mix of policies. Although a thaw in
Russian-Georgian relations is not clearly in the offing, the
Russian government reportedly is beginning to recognize what
the IMF and others in Georgia have been saying for the past
few months: Russian sanctions didn't cripple the Georgian
economy as much as the Kremlin hoped, and in fact, they
opened Georgia's eyes to new markets for its traditional
products. Moreover, if it is true that bad news is better
than no news at all, worldwide publicity generated by the
Russian sanctions on Georgia may have helped to bring the
country's three year old westward orientation and accelerated
reform program to the attention of foreign investors.


4. (SBU) Investors seem poised to act. For the past few
years, Georgia's FDI statistics have been buoyed by
investment in the Baku-Tbilisi-Ceyhan and Shah Deniz
pipelines, and by privatization of many large state-owned
enterprises. With the pipelines' completion in early 2006,
and the list of major unprivatized state companies rapidly
growing shorter, the flow of investment seemed to be about to
dry up. However, in 2006, despite these changes, Georgia

received an estimated USD861 million in FDI, 63 percent more
than in 2005. The government has been citing an even higher
figure, USD1.2 billion, in spite of the fact that the USD400
million sale of UEDC and some hydroelectric plants have been
delayed into 2007. In the course of their review of
Georgia's IMF program, IMF officials interviewed the most
important investors identified by the GOG as having plans to
invest in 2007. The IMF found their plans to be firm. It is
conceivable that Georgia may receive up to another USD1.7
billion in investment in 2007.


5. (SBU) Once official figures are out, the 2006 real growth
rate of the Georgian economy may be as high as 9.3 percent,
in spite of Russia's embargo on Georgian exports and
transport. In fact, Georgian exports increased by 14.7
percent percent in 2006. Its most important export was still
iron and copper scrap metal. Along with strong growth comes
strong demand for imports, especially as the lari
strengthened by 4.5 percent against the dollar over 2006,
even with a certain amount of National Bank of Georgia
intervention to control appreciation. Imports of energy were
more expensive and pushed up import figures, with the cost of
natural gas doubling in 2006 and doubling again at the outset
of 2007. As a result, oil and gas imports increased by 118
percent and the trade deficit by 65 percent in 2006 over

2005. Tourism receipts, especially from Armenians visiting
the Georgian coast, helped to offset the increase in imports.
The National Bank of Georgia's foreign currency reserves
nearly doubled from the end of 2005 to the end of 2006. In
March 2007 the NBG announced reserves had exceeded USD1
billion for the first time, sufficient to cover more than 3
months of imports. Turkey replaced Russia as Georgia's
largest export market, with Azerbaijan not far behind. That
imports from Russia grew is not surprising in light of
increased natural gas prices, but imports from Turkey jumped
85 percent in one year, reflecting a significant redirection
of trade in goods to Georgia's neighbor to the Southwest.


6. (SBU) The GDP growth figures are encouraging, even if to a
certain extent they are based on continuing legalization of
the informal economy that was prominent under the former
regime. Construction is booming and is far and away the

TBILISI 00000652 002 OF 003


largest component of GDP growth. Significant growth is also
occurring in financial intermediation, trade and mining.
Labor productivity is increasing and helping to push economic
growth upward. Agricultural production, which constituted
11.7 percent of Georgia's GDP, contracted in 2006 due to
drought that caused poor harvests.


7. (SBU) The financial sector saw significant growth over the
year 2006. The French bank Societe Generale purchased a
controlling share of Bank Republic, and NBG officials have
told us that another major European bank is about to enter
the market. The issuance of shares on the London Stock
Exchange by the Bank of Georgia is another sign of growth.
The assets of commercial banks increased by 58 percent from
January 2006 to January 2007. Because of the increased tempo
of lending, the quality of the banks' debt portfolios bears
watching. However, the overall state of the financial sector
is generally judged to be good. The percentage of commercial
banks' classified debts was 6.4 percent in the third quarter
of 2006. Although deposits and lending are strongly
dollarized (91 percent of individuals' bank accounts are in
foreign currency, mainly dollars) the growth rate of loans in
Georgian lari was greater than that of foreign currency
loans. Interest rates on loans in the national currency are
about 20 percent and 16-18 percent on foreign currency loans.


THE INFLATION CHALLENGE
--------------


8. (SBU) With food constituting a major portion of the basket
of goods measured for changes in the Consumer Price Index,
the poor harvest in 2006 had some effect on inflation, along
with increases in energy prices. In August 2006, the
12-month change in the CPI peaked at 14.52 percent, up from
5-6 percent six months earlier. By the end of 2006,
inflation had subsided somewhat, resulting in a year-end
inflation figure of 8.9 percent. However, with inflows of
foreign investment, and new increases in the cost of food,
inflation again ticked up in the beginning of 2007, to 10.4
percent year on year in January and 11 percent in February.
A revision of the the consumer basket on which the CPI is
calculated also affected the inflation statistic
significantly. The Georgian Department of Statistics says
that monthly inflation would have been 1.9 percent rather
than 2.7 percent in January under the old formula. February
2007 month-to-month inflation was 0.72 percent.


9. (SBU) The degree to which government policies are
contributing to inflation is a bone of contention between the
government and the IMF. Clearly, NBG interventions to
purchase foreign currency, aimed at keeping the value of the
lari from appreciating too strongly, add to the money supply
and influence the rise in consumer prices. The national
bank's decision to reinstate reserve requirements for
commercial banks and to issue its own deposit certificates
helped to calm inflation in 2006. Stronger action by the
NBG, including increasing reserve requirements and utilizing
more effective sales of government securities, along with a
more flexible attitude toward the value of the lari, will be
necessary to quell inflationary pressures in 2007. The IMF
says the government will have to do its part by maintaining
strict fiscal discipline.


10. (SBU) The government's fiscal stance is a continuous
compromise between Georgia's pressing need for infrastructure
and social spending and the goal of macroeconomic stability.
Government spending added significantly to growth in 2006.
While revenues increased 33 percent, expenditures increased
39 percent. The government's deficit in 2006 was 2.9 percent
of GDP. With the IMF still having a strong influence under
its current Poverty Reduction and Growth Facility, the
government somewhat reined in its spending toward the end of
the year, which helped to reduce inflationary pressures. The
goal for 2007 is a slightly lower deficit, at 2.5 percent of
GDP. The government's total debt at the end of 2006 was
about 29 percent of 2006 GDP, of which 62 percent is held by
foreign creditors. Debt service is 2.2 percent of
consolidated expenditures.

THE CONTINUING PROBLEM OF UNEMPLOYMENT
--------------


11. (SBU) Unemployment remains high in Georgia, around 13.7
percent. The total number of employed people has been

TBILISI 00000652 003 OF 003


steadily declining since 2000, while the percentage of that
group in self-employment has increased. In the third quarter
of 2006, two thirds of the work-force reported themselves as
self-employed. However, wages and salaries are important to
the average family in Georgia, which may have several
household members employed. Wages and salaries constituted
35 percent of total monthly household income. The second
largest share was use of debt, savings and sale of property.
Remittances from outside Georgia added about 10 percent to
household incomes, and there is so far no indication that
they are shrinking despite Russian threats and pressure
against Georgians living in that country. 48 percent of
household expenditures went for food, beverages and tobacco.

THE BOTTOM LINE
--------------


12. (SBU) The Government of Georgia has stated that
macroeconomic stability is a crucial ingredient in its
economic growth strategy. In part, the economy's ability to
weather the shocks imposed by Russia on Georgia's economy
underline the success of the government's reform path.
Embassy Tbilisi is seeing an increasing number of investors
exploring the possibilities offered by Georgia's agricultural
and tourism sectors in response to the improved climate for
business, although manufacturers are lagging behind.
Inflation remains the principal threat to macroeconomic
stability. The government's target for inflation in 2007 is
6 percent or less. This will require a cautious approach to
spending. The government has promised the IMF to save any
greater-than-expected privatization revenues and above-budget
income to finance the budget deficit. Ongoing improvements
in the tax administration process may help to realize that
goal. On the other hand, President Saakashvili proposed
reducing taxes in his recent State of the Union speech, which
may complicate keeping the government's promise if Parliament
acts quickly on his suggestion. On the monetary policy side,
the NBG seeks to limit the growth of the money supply by
increasing international reserves. It says it will deal with
the increased inflows of foreign investment by allowing the
lari to appreciate, with only limited, sterilized
interventions. It also intends to strengthen its open market
operations through direct sales and repurchases of government
securities. It will push development of the secondary market
in government securities. If the government and the NBG can
stick to their stated intentions, the IMF believes they can
meet their goal for controlling inflation.


TEFFT