Extract from 2011 Annual Report
2011 has been a remarkable year for your bank. Bank of Georgia joined the register of the London Stock Exchange premium listed companies following the tender offer announced by its UK – incorporated holding company in December 2011. The high level of participation in the tender offer reflected strong support from shareholders and on 28 February 2012, a wide range of investors, previously restricted in trading overseas securities, gained access to the extraordinary story of Bank of Georgia, which has great opportunities as a leveraged play on the vibrant and growing economy of Georgia.
In my letter to you last year I talked about Georgia’s economy as a success story in the eradication of corruption that could serve as an example for many others. In 2011, Georgia continued to stand out as a country that can boast one of the world’s lowest corruption and crime rates, well-functioning public institutions, prudent banking regulation and a dynamic and growing private sector poised to benefit from the healthy fundamentals of the growth economy and significant inward investment into the country. This year, I would like to touch upon selected economic metrics and main growth drivers of this country that, I believe, is still one of the most notable and rare examples of an investor and business friendly environment.
Despite extremely challenging global economic conditions and low growth in many parts of the world, in 2011, Georgia achieved an estimated 7% real GDP growth to US$14 bn, and foreign exchange reserves that grew 25% to a record US$2.8 million. The country maintained external public debt at a comfortable level of 29% of GDP, decreased its budget deficit from 6.6% of GDP in 2010 to 3.7% in 2011 and annual inflation of 2%.
The market-oriented reforms of the past several years have not only helped Georgia weather the crisis of 2008, but have created a solid foundation for the country’s development. Significant ongoing investment in infrastructure is aimed at enabling Georgia reap the benefits of being the transit and logistics hub of the region and substantially develop growth areas such as hydroelectric power and tourism; distinctive competitive advantages of the country. Already an established regional energy transit hub, Georgia serves as a transport corridor to two crude oil pipelines, one of them the world’s second largest, and two gas pipelines, transporting oil and gas to Europe through Turkey.
As a cheap producer of hydroelectric power than its neighboring countries, Georgia, which enjoys significant untapped hydropower capabilities is gearing up for taking full advantage of these hydroelectric power opportunities. Ongoing investments, both domestic and foreign, in hydropower generating plants and, more importantly, the completion of a new power transmission line to Turkey, will allow Georgia to increase its total transmission capacity 15-fold from the current 1.3TWH and, as a result, will notably increase its electricity exports over the next few years.
Bold investments in tourism-related infrastructure have been bearing fruit for the second consecutive year. 2011 clearly marks the come-back of Georgia, the top tourist destination in Soviet times, as a desired place to visit, with number of tourists rising from approximately 700,000 in 2006 to nearly 3 million in 2011. Foreign tourism revenues are estimated at US$937 million in 2011, a number that is expected to keep growing along with the expected increase in tourists, estimated by the Government to reach 5 million per annum by 2015.
Tourism revenues, now approaching the level of net remittances of US$1.2 billion, the more traditional source of capital inflow for the country, are expected to become a more significant source of capital inflow. Tourism revenues and the steady increase in revenues from exports are expected to gradually diminish Georgia’s reliance on the foreign direct investment (FDI) and donor funding. In 2011, FDI reached circa US$1 billion and is estimated to reach US$1.6 billion by 2015. Diversified across various sectors, FDI is supporting ongoing investments in capital intensive areas (such as hydropower transmission assets), that are also benefiting from donor funding. Approximately US$2 billion of US$4.5 bn pledged donor funds remain undisbursed.
More importantly, strong support from the international community took a more meaningful and tangible shape in 2011. Free Trade Agreements with the EU, currently in the negotiation phase and with the US, currently under discussion, once in place can significantly boost new markets for Georgian products that will lead to further integration of the country with the Western world translating into increased exports and investments to Georgia from these countries. Another important consideration for investors is the continuation of Georgia’s liberal policy and ease of doing business. The country’s unrelenting commitment to market-oriented development has been underpinned by the ratification of the Liberty Act that will ensure that, from 2014, Government expenditure is capped at 30% of GDP, budget deficit below 3% of GDP and Government debt does not exceed 60% of GDP.
The stabilisation in Georgia’s political landscape, both international and domestic, is also worth noting. The WTO accession by Russia, which became possible only after Georgian removal of its objection, will probably not result in Georgian products entering Russian market in the immediate future, but serves as an indication of a step in the right direction. The upcoming parliamentary elections in October 2012 are not expected to bring significant changes – with the President currently enjoying a 79% approval rating, according to the public opinion survey conducted by US firm Greenberg Quinlan Rosner, and with the broad spectrum of the opposition parties in favour of the continuation of recent economic reforms.
Georgia’s achievements have not gone unnoticed by the international community. In the fourth quarter 2011, S&P and Fitch Ratings upgraded the country’s ratings at a time many countries have been downgraded by the same agencies. S&P raised Georgia`s Long-Term Foreign and Local Currency Ratings to “BB-“ and Fitch Ratings upgraded Georgia’s Longterm foreign and local currency Issuer Default Ratings to ‘BB-’ from ‘B+, noting the country’s strong growth performance, strong progress in controlling fiscal deficit and reduction of inflation, among other factors.
With these important elements in place, stemming from the far-reaching reforms enacted several years ago, Georgia offers unique and rewarding opportunities for inward investments. In this report, you will find more information on the stellar performance of your bank, which has an ever-growing role to play in the development of the Georgian economy. I hope in 2012 many of you will join me and many other gratified observers, in our shared anticipation and enthusiasm for the future of Georgia and Bank of Georgia. Irakli Gilauri has built a strong and extremely motivated management team that is well positioned to deliver another excellent business performance in 2012.
Chairman of the Supervisory Board of Bank of Georgia
Chairman of Bank of Georgia Holdings plc Board