Georgian Economy - Back in Business 080825

Standard & Poor’s: B/Watch Negative
FitchRatings: B+/Negativeg g
The Georgian Economy
Back in business, with a little help from
our friends
CONFIDENTIAL
Restricted distribution
August 2008

Introduction
The main body of this presentation describes the achievements and state
of the Georgian economy as of 7 August 2008, as well as the economic,g y g , ,
fiscal and monetary policies that have been at the heart of our success
The direct and indirect damage to the Georgian economy, as well as theg g y,
economic security vulnerabilities exposed by the Russian invasion, are
substantial and may prove irreversible without urgent and massive
economic and financial support from our friends and allies
We have set out in the introductory part below the key factors adversely
affecting the Georgian economy in the aftermath of the Russian invasion.
While the assessment of the scope of the damage and vulnerabilities is
being carried out, we believe the cause-effect analysis and estimate
ranges set out below to be directionally accurate
Back in business, with a little help from our friends August 2008 1

Possible Further Objectives of Russia With Regard to Georgia
Achieve regime change in Georgia by means other than direct military conquest, for
instance by inducing economic collapse, resulting in social upheaval
Damage the credibility of Georgia as a regional trade, transportation and logistics hub inDamage the credibility of Georgia as a regional trade, transportation and logistics hub in
general, and as an important transit route of Caspian oil & gas in particular
(Unsuccessful) air strikes the pipelines
Continuing presence in Poti, the main container port for the Caucasus
Continuing acts of sabotage on the Georgian railway
Presence of illegal checkpoints close to the main East-West highway

Direct Economic Damage Caused by the Russian Invasion
Direct damage has been estimated at or higher than US$1 bn (approximately 10%
of 2007 GDP) – preliminary estimates are set out below
• Roads in need of repair as a result of the Russian armor movement circa• Roads in need of repair as a result of the Russian armor movement circa
US$150 mln
• Destruction of other civilian infrastructure and damage to private property
circa US$350 mln
f l h d l d $ l• Cost of resettling the displaced persons circa US$100 mln
• Farmland and crops circa US$100 mln
• Environmental damage circa US$200 mln
• Forest fires in Borjomi and Ateni ValleyForest fires in Borjomi and Ateni Valley
• Railway explosion near Skra (14 rail cars with oil burnt & spilled)
• Fuel spilled into Black Sea from the Georgian navy ships damaged or sunk
by the Russian navy
• Other
• Loss of fiscal revenue in August-December 2008 of circa GEL 400 mln (US$290
mln) – belying a far greater decline in economic activity for the rest of the
yearyear
• Increased shipping and logistics costs in August-December 2008 of circa
US$100 mln
• These estimates do not include the damage to our military infrastructure

Key Threats to the Economy – Erosion of Consumer Confidence
The two major threats are the erosion of consumer confidence and the erosion of
investor confidence. We will address each separately
Consumer confidence would remain low for the rest of the year even if RussiaConsumer confidence would remain low for the rest of the year, even if Russia
undertakes no further hostile acts
This would have a direct and immediate adverse effect on demand for residential real
estate and durable consumer goods, as well as tourism and travel
The fragmented and nder capitalised real estate de eloper ind str alread s fferingThe fragmented and under-capitalised real estate developer industry, already suffering
from the high interest rate environment, would suffer, with an estimated 30+
developers possibly becoming insolvent
The direct banking sector exposure to the developers at risk is estimated at circa GEL
200 mln 50% provisioning may well be in order in the short term (over 6 months)200 mln. 50% provisioning may well be in order in the short term (over 6 months)
In addition, the banking sector exposure to mortgages on properties sold off-plan by the
vulnerable developers is estimated at GEL 75 mln. Again, given the low probability of
any of these buildings being completed any time soon, 50% provisioning may well be in
order in the short term (6 12 months)order in the short term (6-12 months)
In addition, the banking sector exposure to the tourism and hospitality sector, retail sector
(affected by both the decline of consumer demand and losses due to transportation
difficulties), as well as the regional economy in central Georgia (near Gori) may result in
additional sector wide provisions of up to GEL 100 mlnadditional sector-wide provisions of up to GEL 100 mln
The overall decline of business activity in several key sectors of the economy would require
additional provisioning of circa GEL 100 mln on outstanding consumer loans and credit card
balances

Erosion of Consumer Confidence and its Consequences cont’d
Thus, the adverse effect on the banking sector over the next 6-12 months due to the erosion
of consumer confidence may be expected in the GEL 200-400 mln range
This adverse effect will likely be exacerbated by additional provisions of up to GEL 50 mln due
to the reduced demand for goods and services from the government (itself a result of the
need to cut budget expenditures due to the expected decline in fiscal revenue)
To place the above numbers in context, the aggregate 2008 net income of the banking sector
prior to the Russian invasion had been estimated at GEL 200-250 mln
Such a dramatic swing in the profitability despite its one off nature implies that theSuch a dramatic swing in the profitability, despite its one-off nature, implies that the
economy would be deprived of circa GEL 0.8-1.5 bn of incremental bank lending in 2009 (due
to capital adequacy requirements). The adverse impact of this alone on the economy,
especially given the expected reduction in private capital inflows, could be equal to 4%-5% of
GDP and a significant increase in unemployment and decline in fiscal revenue The aggregateGDP and a significant increase in unemployment and decline in fiscal revenue. The aggregate
loan book of the banking sector stood at GEL 5.5 bn at 30 June 2008, having grown in 1H 2008
by GEL 0.9 bn or 20%
In addition d e to the c rrent liq idit constraints the banks ma ell need to red ce o erIn addition, due to the current liquidity constraints, the banks may well need to reduce, over
the next 6 months, their current loan books by an aggregate of GEL 500 mln, further depriving
the economy of credit

Erosion of Consumer Confidence and its Consequences cont’d
Given that approximately 60% of the above-mentioned provisions pertain to loans in US$, the
banks would need to purchase over the next 6 months approximately US$150-200 mln in the
open market to keep their open foreign currency position in check
This additional demand for US$, in the context of Georgia’s BOP structure and reduced private
capital inflows, may well result in the 10%-20% depreciation of the Lari over the next 6
months – even if no further waves of panic withdrawals of liquidity or conversion of GELmonths even if no further waves of panic withdrawals of liquidity or conversion of GEL
balances to US$ occur
Such a depreciation of the Lari may well unleash a second wave of problems for the banking
sector, resulting in difficulties in repaying foreign currency borrowings in the worst case, or
reducing the banks’ ability to borrow internationally in the best case – thereby causing further
credit contraction with attendant adverse effect on the economy

Erosion of Investor Confidence and its Consequences
Georgia, with Current Account Deficit (CAD) of approximately 20% of GDP in 2007 and
private capital inflows of circa 23% of GDP in 2007 (including FDI of 19.8% of GDP and the
remainder comprising foreign borrowing and portfolio investment), is critically dependent
on foreign investment inflows for growth and balance of payments financing
If, as and when foreign investment inflows evaporate or fail to recover to anywhere near
the pre-invasion levels, as is currently expected, and further international borrowing by the
banks is impeded, the economy would be deprived of circa 4%-5% of growth, with attendantp , y p g ,
effects on employment and fiscal revenue
The CAD will likely contract significantly, as FDI-driven imports of capital goods comprised
(pre-invasion) circa 60% of total imports, but a financing gap may nonetheless arise, putting
further downward pressure on the Larifurther downward pressure on the Lari
Consumer imports would contract as well, putting further pressure on the consumer-
oriented sectors of the economy. In addition, should Russia move to restrict in any way
remittances to Georgia (over 60% of aggregate remittances of circa US$800 mln in 2007
came from Russia) this may trigger a collapse in the consumer economy and set back thecame from Russia), this may trigger a collapse in the consumer economy and set back the
standard of living by several years – with consequent social ramifications and potential
political instability
Even if the worst-case scenario, laid out above, is avoided, reduced investor appetite for
investing in Georgia will likely deprive the economy in the short term of approximately
US$2-3 bn of funding for critical infrastructure upgrade and rehabilitation projects. Delay in
the implementation of these infrastructure projects will impede considerably the ability to
sustain high rates of economic growth in the medium term

Adverse Impact of Any Future Hostile Actions by Russia
The above analysis is static in a sense that it describes the adverse effects on the Georgian
economy of the Russian actions to date
Further adverse effects on the economy, potentially leading to economic collapse and socialy, p y g p
upheaval, include
Continuing illegal presence of the Russian troops and checkpoints and possible
attempts to impede the flow of goods and people by extorting bribes or prohibiting
outright the movement of civilian cargooutright the movement of civilian cargo
Any movement of troops causing consumer panic and a new wave of liquidity
withdrawal from the banking sector
New acts of sabotage and explosions, further damaging our civilian infrastructure.
The economy overall and consumer and investor confidence are particularly
vulnerable to further damage inflicted on the railway and other transport
infrastructure
Any restrictions on remittances and bank wire transfers to Georgiay g
Threatening statements by the Russian leadership, further heightening the investors’
anxiety

Request for US Economic Recovery Package for Georgia
The US$750 mln Stand-By Arrangement the IMF is currently contemplating is an important measure to
ensure macroeconomic stability and financial sector liquidity
However, given the threats and vulnerabilities of the Georgian economy described above, much more
is needed for Georgia to avoid economic collapse and commence recovery
US$1-2 bn cash grants by the United States and Europe to the Phoenix Fund (established with the
World Bank’s help and oversight as a multi-donor trust fund) for damage repair, rehabilitation and
upgrade of critical infrastructure
Replaces the private sector and fiscal funding that is no longer available for such projects
Enhances Georgia’s energy and transport security
Tangible manifestation that the US and other friends and allies will not let the Georgian
economy fail – helps restore consumer and investor confidenceeconomy fail helps restore consumer and investor confidence
US-Georgia Free Trade Agreement
Extended availability (for 10 years) of OPIC political risk insurance
Available to the Georgian government for any government-owned assets
Available to any owner/investor in key strategic assets on Georgian soil identified by the
Georgian government
These measures would send a strong message to the Georgian population and global investor
community (as well as Russia) that US economic interests are allied with Georgia’s – thereby playing
a crucial role in restoring consumer and investor confidence and helping Georgia avert the negative
scenario outlined above
Given that the vulnerabilities we have identified may play out in the next few months, it is critically
important that these steps are taken – and properly publicised – as quickly as possible

Overview of the Georgian Economy

Country overview
Population: 4.6 mln (Department of Statistics)
Capital: Tbilisi
Government type: Republic
Area: 69,700 sq km (26,911 sq miles)
State language: Georgian
Major religion: Christianity
Life expectancy: 69 years (men), 77 years (women)
(UN)
Median age: 38 years
Monetary unit: Georgian Lari (GEL)y g ( )
GEL/US$: 1.4130, GEL/EUR: 2.1476
2007 GDP: GEL17.0 bn (US$10.2 bn)
2007 GDP per capita: GEL3,868 (US$2,315)
2007 Real GDP Growth: 12.4%, versus 9.4% in 2006
and 9.6% in 2005
CPI: 2007 period average was 9.2% versus 9.2% in
2006 and 8.2% in 2005
Net FDI inflows: US$2,014.8 mln in 2007 versus
US$1,076 mln in 2006 and US$542 mln in 2005
Source: CIA Factbook, BBC

Key Investment Highlights
Sustained liberal reforms in 2004-2008
• Modernisation of the state and civil service
• Successful supply-side fiscal experiment with low, flat and decreasing taxes
• Radical deregulation and liberalisation
Rapid economic growth (9.3% in Q1 2008, 12.4% in 2007, 9.4% in 2006), driven by
• The Schumpeterian burst of entrepreneurial activity
• Rapid credit expansion
• Growth in domestic consumption led by the rapidly expanding middle class
• Rehabilitation of infrastructure
• Export growth (‘03-‘07 CAGR of 26%) and diversification
• Steadily increasing remittances (US$775 mln in 2007 vs. US$87 mln in 2003)
• Off-the-charts high FDI inflows (19.8% of GDP in 2007, 13.9% of GDP in 2006, cumulative in 1996-2007 54% of ‘07 GDP)
High resilience to external shocks (e.g. energy & commodity prices, Russian embargo, sub-prime meltdown)
Fresh five-year mandate to continue implementing reform-oriented policies
Key investable sectorsy
• Financial services
• Agribusiness/consumer goods
• Real estate
• Hydro power generationy p g
• Tourism & hospitality
• Retail
• Transport & logistics

Sustained liberal reforms of 2004-2008 have laid a sound
foundation for long term sustainable growthfoundation for long term sustainable growth
Positive political outlook
• Fresh five-year mandate for the
confirmation of the reforms after
President Saakashvili’s first-round re-
election (53.5%) and parliamentary
l ti i 2008
Prudent fiscal policy
• Low, flat and decreasing taxes
• Mandatory fiscal surplus from 2009
• Sovereign wealth funds being created
• Expenditure cap of 25% of GDP considered
f 2011elections in 2008 from 2011
Vibrant & rapidly growing financial sector
• Banking sector assets/GDP at 44% at YE2007,
up from 16% at YE2003
• Assets ‘03 – ’07 CAGR of 52%
Effective monetary policy
• Move to explicit inflation targeting in 2009
• CPI target limited by law to single digits
• Parliamentary confidence vote on central bank governor
Robust Economic
Performance &
Assets 03 07 CAGR of 52%
• Loans ‘03 – ’07 CAGR of 57%
• Deposits ‘03 – ’07 CAGR of 48%
• No state-owned banks since 1996
• No restrictions on foreign ownership of the
banks, 7 of the top 10 banks foreign-controlled
• NPLs at a manageable level of 2.6%,
predominantly collateralized lending
• Parliamentary confidence vote on central bank governor
in case of four consecutive quarters of +/- 2% deviation
from the target
• Period average CPI of 9.2% - 10.2% since 2006
• Main policy rate increased by cumulative 500bps (to 12%)
since November 2007
• YTD CPI of 3.2%
• July ‘08 y-o-y period-end CPI of 9.8% - one of the lowest
Sustained Growth
predominantly collateralized lending
• BIS CAR of circa 19%
• Loan/deposits ratio of 1.3x
• Borrowed funds 27% of total assets
• Further sector reforms
in the region
• Broad money y-o-y growth reduced to 28.2% by July 2008
• Full currency convertibility since 1997
• Stable currency and managed float
Strong capital inflows
• Net FDI 19.8% of GDP in 2007
• Portfolio investment inflows
Expanding economic base
• Radical deregulation & liberalisation
since 2004
Positive external momentum
• Total public debt as % of GDP reduced
from 56% in 2003 to 23% in 2007
External public debt as % of GDP reduced
f 38% i 2003 t 15% i 2007 • Moderate banking and private sector
borrowing
• Net remittances 7.4% of GDP in 2007
since 2004
• Entrepreneurial boom, with over
50,000 new business registered p.a.
• Pronounced shrinkage of grey
economy & corruption since 2004
• Export diversification and growth
(‘03-‘07 CAGR of 26%)
from 38% in 2003 to 15% in 2007
• FX reserves increased from US$191 mln in
2003 to US$1,446 mln in July 2008
• Successful debut 5-year 7.5% RegS
Eurobond of US$500 mln issued in April 2008

Radical reforms created a favourable market environment…
Economic Freedom Index, 2007Ease of Doing Business, 2008
12
10
5
Estonia
UK
USA
18
17
6
3
GEORGIA
Estonia
Uk
USA
(U f 35 i 2007)
74
68
64
59
48
43
38
32
12
T k
Romania
Itanly
Bulgaria
France
Hungary
Latvia
GEORGIA
Estonia
81
71
57
48
46
39
22
18
Montenegro
Kazakhstan
Turkey
Romania
Bulgaria
Armenia
Latvia
GEORGIA (Up from 35 in 2007)
(Up from 44 in 2006)
134
133
107
76
74
Russia
Ukraine
Azerbaijan
Kazakhstan
Turkey
139
110
106
96
86
Ukraine
Belarus
Russia
Azerbaijan
Serbia
g
Source: World Bank, 2008 (Rank out of 178 countries) Source: The Heritage Foundation
3821
22
45Voice and Accountability
Georgia Former Soviet Union Income level peers
Corruption Perception Index, 2007
(Percentile ranks)
84
79
79
64
Montenegro
Serbia
GEORGIA
Turkey
Worldwide Government Indicator, 2007
(Up from 99 in 2006)
38
34
38
39
20
28
26
27
33
44
51
22
Rule of Law
Regulatory Quality
Government Effectiveness
Political Stability/No Violence
143
118
111
105
99
84
Russia
Ukraine
Moldova
Albania
Armenia
FYR Macedonia
38
38
22
20
45Corruption
ule o aw
Percentile rank indicates the percentage of countries worldwide that rate
below the selected country. Higher values indicate better governance
ratings
Source: World Bank
Source: Transparency International; 178 countries ranked
150
150
150
Azerbaijan
Belarus
Kazakhstan
Source: World Bank

…and provided the platform for high economic growth…
11 1%
12.4% 14%12
GDP
Nominal GDP (US$bn) Real GDP growth, y-o-y (%)
7 8
10.2
11.1%
5.9%
9.6% 9.4% 9.3%
4%
6%
8%
10%
12%
4
6
8
10
4.0
5.1
6.4
7.8
2.7
0%
2%
4%
0
2
4
2003 2004 2005 2006 2007 Q1 2008
Source: Department of Statistics of Georgia
Components of nominal GDP, 2007 Comments
Boosted by aggressive economic reforms and substantial FDI
inflows, Georgia’s economy continues to show strong growth
Rapid economic growth has been driven by
Agriculture,
9.4% Manufacturing,
8.4%
C t ti
Other, 29.2%
• A burst of entrepreneurial activity
• Growth in domestic consumption led by a new middle class
• Rehabilitation of infrastructure, and
• Exports
Georgia’s economic performance in 2006 and 2007 is
Construction,
6.7%
Trade, 13.1%
Public
Administration,
Education &
Healthcare,
7.4%
Georgia s economic performance in 2006 and 2007 is
particularly impressive, taking into consideration the
consecutive external shocks (Russian embargo, rising
commodity prices & subprime meltdown) and tight monetary
policy
Nominal GDP = US$10,175 mln
Transport &
Communications,
10.7%
Financial
Intermediation,
2.2%
12.8%

…that is improving living standards and providing economic
diversification
Nominal GDP per capita (LHS)
Consumer indebtedness per capita (RHS)
diversification
Nominal GDP per capita
(US$)
GDP per capita (PPP)
(US$)
5 000
(US$)
919
1,188
1,484
1,764
2,315
60
90
120
150
180
1,000
1,500
2,000
2,500
2,656
2,911
3,288
3,642
4,176
2,000
3,000
4,000
5,000
0
30
60
0
500
2003 2004 2005 2006 2007
Source: International Monetary Fund
0
1,000
2003 2004 2005 2006 2007E
Source: Department of Statistics of Georgia , National Bank of Georgia
4,000
5,000
60%
Agriculture Industry
Energy Construction
Transport & Communications Financial Intermediation
Healthcare
GDP per capita (PPP)Broad-based economic growth
(US$)
200720052001200320032001
4,396 4,330 4,264 4,237 4,197 4,176
0
1,000
2,000
3,000
ia
an
ia
ia
ne
ia
20%
40%
60%
Yrealincrease
-/NA
/BB-
BBB+
/BBB
/BBB
BBB
Romani
Kazakhsta
Bulgari
Russi
Ukrain
Georgi
-20%
0%
2003 2004 2005 2006 2007
Y-o-Y
Source: Department of Statistics of Georgia Source: International Monetary Fund
B+/BB-
B1/BB-/
Baa2/BBB+/B
Baa3/BBB+/
Baa2/BBB-/
Baa3/BBB-/B

Strong investment inflows from strategic and...
Net FDI as % of GDP, ‘07
6.3%
19.8%
Ukraine
Georgia
Agriculture Industry
BP/BTC/SCP Banking
Other Sectors Net FDI as % of GDP
Net FDI inflows FDI breakdown by origin
(US$ mln)
2005 2006 2007
UK 29.6% UK 15.7% Czech Republic 13.2%
A b ij 14 9% USA 15 3% N th l d 13 0%
2.8%
4.1%
4.4%
5.8%
6.3%
Hungary
Russia
Poland
Kazakhstan
8.3%
9.4%
8.5%
13.9%
19.8%
9%
12%
15%
18%
21%
900
1,200
1,500
1,800
2,100
2,400
Other Sectors Net FDI as % of GDP
1,076
2,015
Source: National Bank of
Georgia, International Monetary
Fund
Azerbaijan 14.9% USA 15.3% Netherlands 13.0%
Cyprus 10.6% Kazakhstan 12.8% British Virgin Islands 10.3%
Russia 8.6% Turkey 10.9% Cyprus 8.1%
Norway 5.3% Azerbaijan 6.5% Turkey 6.8%
Italy 5.1% Norway 6.5% Kazakhstan 6.4%
Turkey 4.8% British Virgin Islands 4.9% UK 6.2%
Japan 3.7% Italy 4.0% USA 5.6%45%
54%
50%
60%
5
6
Cumulative Net FDI since 1996
Cumulative Net FDI as % of GDP
0%
3%
6%
-
300
600
900
2003 2004 2005 2006 2007
331
483 542
Source: Department of Statistics of GeorgiaSource: Department of Statistics of Georgia
USA 3.3% Denmark 3.6% Denmark 5.5%
France 3.2% Cyprus 3.4% Russia 4.3%
Subtotal 89.1% Subtotal 83.6% Subtotal 79.4%
Other 10.9% Other 16.4% Other 20.6%
Total 100.0% Total 100.0% Total 100.0%
1 3
1.8
2.3
3.5
5.5
34%
36% 36%
10%
20%
30%
40%
1
2
3
4
US$bn
Privatisation Selected strategic investors
(US$ mln)
297
380400Source: Department of Statistics
of Georgia
1.3
1.8
0%0
2003 2004 2005 2006 2007
500
Cumulative Net FDI per capita
228
266
100
200
300
258.8
438.0
200
300
400
500
US$
Source: Ministry of Economic Development of Georgia
24 38
0
100
2003 2004 2005 2006 2007 2008YTD
Source: Department of Statistics
of Georgia
73.9
108.5 97.8
0
100
2003 2004 2005 2006 2007

Portfolio investors
DEBTEQUITY
• Up to 300 institutional investors invested in Georgian debt and equities in 2004-2008
LOCALLOCAL
EUROCLEAR
etc
ONLY

…have comfortably financed most of the current account deficit
2,015
25%2,500
CAD Net FDI CAD as % of GDP CAD + Net FDI, as % of GDP
Current account deficit
(US$mln)
331 483 542
1,076
-1.1%
2 7%
-2.5% -1.0%
1.0%
0%
5%
10%
15%
20%
0
500
1,000
1,500
2,000
-376
-344 -701
-1,154
-1,917
-9.4%
-6.7%
-10.9%
-14.9%
-18.9%
2.7%
-25%
-20%
-15%
-10%
-5%
-2 500
-2,000
-1,500
-1,000
-500
2003 2004 2005 2006 2007 -25%-2,500
Exports and imports*
5 895
7,000
Imports Exports
2003 2004 2005 2006 2007
CAGR(‘03 ‘07) 33% CAGR(‘03 ‘07) 26%
(US$mln)
Source: National Bank of Georgia
1,866
2,493
3,319
4,413
5,895
1 287
1,644
2,183
2,568
3,240
2 000
3,000
4,000
5,000
6,000
CAGR(‘03-‘07): 33% CAGR(‘03-‘07): 26%
1,287
1,644
0
1,000
2,000
2003 2004 2005 2006 2007
* Export & import of goods and services
Export & import of goods and services

Liberal Trade Regime Diversified Trade Structure
WTO member since
2000 Turkmenistan,
2%
United Arab
Emirates 2%
China, 1% United Arab
Emirates 4%
Bulgaria, 4% Turkmenistan,
3%
Liberal Trade Regime, Diversified Trade Structure
Export structure* by country, 2007 Import structure* by country, 2007
Simplified customs
regime since August
2006, new customs code
became effective in
2007
EU,
22%
C d 6%
Bulgaria, 5%
Russia, 4%
Kazakhstan,
3%
2% Emirates, 2%
Other, 3%
Uk i 11%
Azerbaijan,
7%
USA, 4%
China, 4%
Emirates, 4% 3%
Armenia, 1%
Kazakhstan,
1%
Other, 8%
No quantitative
restrictions on trade
Zero tariff on the
majority of goods
Turkey,14%
USA,
12%
Azerbaijan,
11%
Armenia, 9%
Ukraine, 8%
Canada, 6%
EU, 30%
Turkey, 14%
Russia, 11%
Ukraine, 11%
One of the two
beneficiaries of the EU
GSP+ Scheme in the CIS
since 2006, granting
local companies the
right to export 7,200
11%
Ferrous
Beverages,
S i i &
Vessels &
Aircraft 1%
y,
Oil & Gas Mechanical
Export structure* by product, 2007 Import structure* by product, 2007
Source: Department of Statistics of Georgia Source: Department of Statistics of Georgia
g p ,
categories of goods
duty-free
Share of EU in
exports up to 22% from
17% in 2003
Ferrous
Metals, 21%
Spirits &
Vinegar,
12%
Ores, 6%Oil & Gas 4%
Sugar, 2%
Pharmaceuticals,
2%
Aircraft, 1%
Other, 24%
Oil & Gas,
18% Equipment &
Electrical
Machinery,
17%
Plastic, 3%
Sugar, 2%
Paper, 2% Other, 31%
In November 2007
Georgia entered into a
free trade agreement
with Turkey
* Export & import of goods only
Ores, 6%
Vehicles, 6%
Gems &
Precious
Stones, 6%
Cement, 5%
Equipment &
Rail Cars, 5%
Fertilizers, 5%
Oil & Gas, 4%
Vehicles, 10%
Ferrous Metal
Products, 8%Cereals, 4%
Pharmaceuticals,
3%
Ferrous
Metals, 3%
Export & import of goods only Source: Department of Statistics of Georgia

Entrepreneurial activity has flourished…
New business registrations per year Number of registered businesses
(Thousands) (Thousands)
51
60
29 30
43
35
20
30
40
50
Source: Ministry of Finance Source: Ministry of Finance
0
10
2004 2005 2006 2007 2008YTD
Number of registered businesses per 100 adults Starting a business, 2008
5
5
5
6
16
11
7
USA
Latvia
GEORGIA
Estonia
Time (days) Procedures (number)
9
9
8
8
6
6
6
6
6
18
13
29
21
14
13
10
6
6
Germany
Itanly
Russia
Kazakhstan
Romania
UK
Netherlands
Turkey
USA
Source: World Bank - Doing Business 2008 Source: World Bank report - Doing Business 2008
12
11
10
9
9
9
30
23
27
32
18
Azerbaijan
Hungary
Ukraine
Bulgaria
Armenia
Germany

…and the banking sector has provided significant credit
growthg owt
Banking sector assets and ROA NPLs as % of total loans
(US$mln)
Georgia’s banking
sector represents
only a moderate
contingent liability
8%
5%7,000
Banking sector assets ROA (%)
g y
of the sovereign
Entirely private
owned 1996
No restrictions on
foreign ownership of
7.4%
6.2%
3.8%
4%
6%
2 473
4,316
5,777
3.9%
1.9%
3.1%
2.8%
1 9%
2%
3%
4%
2 000
3,000
4,000
5,000
6,000
foreign ownership of
banks
Attracting increasing
foreign investment –
7 out of top 10
banks majority
foreign owned
2.5% 2.6%
0%
2%
2003 2004 2005 2006 2007
Source: National Bank of Georgia Source: National Bank of Georgia
623 885 1,406
2,473
1.9%
1.9%
0.6%
0%
1%
0
1,000
2,000
2003 2004 2005 2006 2007 2008YTD
Gross loans to GDP Funding structure
foreign-owned
Well capitalised with
average BIS capital
adequacy ratio of
19%
G th h
92%
75%73%69%63%
54%
80%
100%
g g
1 3 30%1.3
Loans/Deposits (LHS)
Borrowed funds as % of total assets (RHS)
Growth has
moderated in 2008,
with banking sector
assets up 15.7% YTD,
(in GEL) (Jan – May)
to US$ 5,777 mln
54%
46%42%41%
27%
19%
26%
18%15%
0%
20%
40%
60%
ica
tan
blic
ece
ary
ine
key
sia
and
'07
'06
rus
jan
nia
1.0
1.1
1.1
1.3
17.6%
17 5%
20.2%
26.9%
20%
25%
1.0
1.1
1.2
SouthAfri
Kazakhst
CzechRepub
Gree
Hunga
Ukrai
Turk
Rus
Pola
Georgia
Georgia
Belar
Azerbaij
Armen
0.915.9%
17.5%
10%
15%
0.8
0.9
2003 2004 2005 2006 2007

Monetary system
Exchange rate evolution (period average)National Bank of Georgia
Established in 1991, NBG is an autonomous public entity
responsible for: 2 43
2.6
US$ EUR
responsible for:
• Implement monetary and foreign exchange policies
• Deal foreign reserves
• Act as the fiscal agent for the government
The main remit is to achieve and maintain price stability
2.15
1.91
1 81
2.43
2.38
2.26 2.23
2.29 2.28
2.0
2.2
2.4
p y
Moving to explicit inflation targeting in 2009, with annual
average CPI target <10%
FSA & FMS established as independent agencies under the
auspices of NBG
1.81 1.78
1.67
1.49
1.4
1.6
1.8
Monetary policy CPI (period-average)
Since spring 2006, the NBG has raised interest rates
several times in response to the inflation rate, which, in
0%
11%
2003 2004 2005 2006 2007 2008YTD
p , ,
part, has resulted in the Lari appreciating against the
U.S. Dollar
Cumulative increase of the main policy rate by 500bps to
12% since November 2007
8.2%
9.2% 9.2%
10.4%
7%
8%
9%
10%
In September 2006, the NBG introduced its own
securities (certificates of deposit) that have become the
main tool of monetary policy with respect to liquidity in
the banking sector
NBG’s inflation target for 2008 is 8.0%
4.8%
5.7%
4%
5%
6%
2003 2004 2005 2006 2007 2008YTD

From 2009, a fiscal surplus is required by law
40%4,000
Budget expenditure breakdown, 2007Impressive tax revenue performance
(US$mln) Revenue as % of GDPNon tax revenue
Tax revenue
Economic
activities,
13%
Other, 31%
2,629
3,21716.0%
23.1% 24.2%
26.8%
29.3% 29.7%
20%
30%
2,000
3,000
,
13%
Defence,
26%
Enviroment
Social
Expenditures,
14%
32 110 162 212 287 326582
1,008
1,331
1,770
2,629
0%
10%
0
1,000
2003 2004 2005 2006 2007 2008F
Enviroment,
1%
Healthcare,
4%Culture, 3%
Education,
8%
%
Total Budget outlay: US$3.5 bn
S Mi i t f Fi Source: Ministry of Finance
2 4%200
Conventional deficit, commitment (IMF Standard)
Conventional deficit as % of GDP
Budget deficit, 2003-2008F Comments
(US$mln) Elimination of some and reduction of the overall number of
taxes
Flat profit tax of 15%
Source: Ministry of Finance Source: Ministry of Finance
-62
121
-115
-236
-483 -506-1.5%
2.4%
-1.8%
-2%
0%
2%
-200
0
200 p
Unified personal income tax and social (payroll) tax at 25%, to
be reduced to 15% by 2012
Since 2004, the government has been highly effective in raising
tax revenues and reducing the size of the shadow economy
The increase in spending in 2007 was mostly due to the defence
sector related to NATO accession aspirations
-3.0%
-4.8%
-3.5%
-8%
-6%
-4%
-600
-400
Source: Ministry of Finance
sector related to NATO accession aspirations
In 2008, defence and security spending will remain a priority
along with social and welfare spending
Law amendment proposing to cap the budget expenditures as %
of GDP to 29% in 2009, 27.5% in 2010 and 25% in 2011 and
beyond has been submitted to parliament
2003 2004 2005 2006 2007 2008F
Source: Ministry of Finance

Georgia successfully priced its inaugural US$500mln 5 year international bond,
setting an important benchmark for the country's non-sovereign sectorg p y g
Key transaction termsKey transaction terms Transaction highlightsTransaction highlights
■ On April 7, Georgia successfully priced its inaugural US$500 million 5-year international bond, setting an
important benchmark for the country’s non-sovereign sector
■ Georgia’s impressive credit story and the overall scarcity of sovereign external debt generated significant
investor interest as demonstrated by the well attended roadshow and the over 3x order book oversubscription
Issuer: Georgia
Rating: S&P: B+ / Fitch: BB-
Issue currency: US$ (i.e. USD1.6 billion)
The roadshow included meetings and calls with over 55 investors in total
Of those investors engaged in the roadshow, approximately 90% provided orders for the transaction
The order book was composed of extraordinarily high quality investors with a number of anchor orders
(i.e. USD50 million or more) from Europe and the US
The transaction reached its target size of US$500mm within only 2 hours of bookbuilding and with USD1.6
billion of total demand, the order book closed within 6 hours of announcement
■ The intra-day execution strategy after a series of investor meetings the prior week strategically minimized
Issue currency: US$
Issue size: US$500 million
Issue format: Reg S only
Settlement date: April 15, 2008 (T+6)
Maturity date: 15 –Apr-2013
Coupon: 7.50%
I i 100 00% execution risk
■ With over 100 international investors from 23 countries participating in the deal, Georgia’s benchmark offering
achieved great distribution diversity and successfully introduced the country to approximately 85 new fixed-
income investors
■ The issue size of USD500 million will ensure that the bond will qualify for inclusion in JPMorgan’s EM debt
indices, which after the seasoning period will further increase the bond’s benchmark status
■ The significant oversubscription allowed for pricing at the very low end of initial guidance (i.e. 7.50%) and
compares favourably to Gazprom’s (A3/BBB/BBB) recent benchmark as well as other recent debut sovereignOrder analysis (US$ million)Order analysis (US$ million)
Issue price: 100.00%
Yield: 7.500% (MS+398bps)
Denominations: US$100,000
Bookrunners: JPMorgan / UBS
offerings
■ After Russia, Ukraine, and Kazakhstan, Georgia is only the fourth sovereign from the CIS to issue an
international bond and the only sovereign borrower from the region this year
■ Georgia’s transaction is the only debut deal in the emerging markets in 2008 and achieved the lowest coupon
of 7.50% out of all the debut emerging market sovereigns in the last 2 years
■ The offering performed well in the after-market, trading up to 101.75% during the second day of trading
I t b l tiI t b l ti I t b tI t b t
648
500
600
700
Order Size Number of orders
Investor by locationInvestor by location Investor by typeInvestor by type
344
255
351
77
200
300
400
France,
4%Other,
12%
Denmark, 5%
Netherlands, 8%
Pension Funds , 3%
Hedge Funds, 3%
Insurance, 10%
Banks 15%77
22 4 3
0
100
0-20mln 20mln-50mln 50mln-100mln 100mln and
above
UK, 48%
Germany , 7%
US offshore, 16%
Asset Managers,
69%
Banks, 15%

Georgia enjoys strategic energy independence
Energy supplyMap of Georgia’s pipelines
Oil pipelines
• Baku-Tbilisi-Ceyhan (BTC)Baku Tbilisi Ceyhan (BTC)
• Baku-Supsa
Natural gas pipelines
• SCP Shah-Deniz
• North-South
• South-Caucasus
Electricity supply
Georgia become a net exporter of electricity for the first
time in 2007
Energy consumption per unit of GDP(TOE/US$), 2007Gas price evolution in Georgia
time in 2007
While a net importer during the winter months, Georgia
exports its excess capacity to Turkey etc during the summer
US$
3 3 3 37 3 584
110
167
90
120
150
180
r1000m3
$
0.46 0.63 0.73 0.74 0.75
1.73 1.73 2.00 2.09
3.35 3.37 3.58
0
1
2
3
4
60 65 65
0
30
60
2003 2004 2005 2006 2007
Per
Latvia
Lithhuania
Georgia
Armenia
Estonia
Azerbaijan
Belarus
Kazakhstan
Russia
Uzbekistan
Ukraine
Turkmenistan
Source: Ministry of Energy Source: Core International, USAID
y f gy ,

Looking ahead: our formula for success
“Compassionate Libertarianism”
Social programs now account 32% of the budget expenditures (up from 29% in 2007), but
Fiscal prudence …p
Broadly balanced budget in 2008 (on a fiscal, but not monetary basis)
Budget surplus becomes mandatory from 2009...
With the surplus and asset sale proceeds absorbed by the two sovereign funds we are establishing
Continued reduction of tax rates and abolition of taxation of financial instrumentsContinued reduction of tax rates and abolition of taxation of financial instruments
Budget Expenditures/GDP reduced in 2008 to circa 30% from 32% in 2007 and proposed to be capped
eventually at 25%
And tight monetary policy
Explicit inflation targeting from October 2008 with the target not exceeding 10%Explicit inflation targeting from October 2008, with the target not exceeding 10%
Four interest rate increases since November 2007, by cumulative 500 bps
July ‘08 y-o-y period-average CPI 10.4% (compared to 9.2% in 2007 and 9.2% in 2006)
Completion of privatisation and proactive engagement with investors
The Global Competitiveness of the Financial Services Sector Act
Free Industrial Zones
Further enhancement and streamlining of the AML regulations
FSA established as the independent mega-regulatorp g g
International Financial Companies & Qualified Investor Funds, no taxation of financial instruments – an
investor-friendly jurisdiction
Stock exchange demutualisation & remote membership, securities quoted in any currency

Investor confidence remains high in 2008…
Notwithstanding the current conditions in the global financial markets, investor confidence in Georgia remains high, with
YTD private capital inflows exceeding US$1 bn. Highlights include the following:
• On 10 January 2008, Bank of Georgia (LSE:BGEO), the largest universal bank in Georgia, announced that it had
successfully placed a US$65 mln senior loan facility through Merrill Lynch. In February 2008, Bank of Georgia
announced that it raised US$100 mln through a rights issue of GDRs with ING bank acting as the bookrunner. In June,
the Bank announced a successful placement of US$110 mln two-year Loan Passthrough Notes arranged by JPMorgan
• In February 2008, TBC Bank raised a subordinated loan of US$10 mln. In March 2008, TBC Bank obtained a US$30 mln
line from BNP Paribas and a US$100 mln debt facility through Merrill Lynch
• In 2008, several new banking licenses were issued, with Halyk Bank, a group of European and Georgian investors andg y g p p g
Dhabi Group each obtaining a banking license
• In March 2008, Dhabi Group announced that Kor Bank, its wholly-owned newly-established Georgian bank, acquired a
100% equity interest in Standard Bank, a top 10 Georgian bank, for GEL70 mln
• In January 2008, GRDC, a leading real estate developer, announced that it had successfully closed a US$105 mln equity
private placement with several institutional investorsp p
• In February 2008 Caucasus Energy & Infrastructure (GSE:NRGY), the permanent-capital vehicle investing in energy and
infrastructure assets, announced that it had placed US$50 mln of new equity and was admitted to trading on the
Georgian Stock Exchange
• In February 2008, KazMunaiGas announced the purchase of the Batumi oil terminal assets and long-term lease of the
Batumi port assetsatu po t assets
• In February 2008, EFES Breweries International acquired a 100% equity interest in Natakhtari Brewery
• In March 2008, Populi, the leading supermarket chain in Georgia, raised GEL5 mln through a rights issue
• In April 2008, Government of Georgia successfully completed the sale of 51% equity interest in Poti Sea Port to RAK
Investment Authority . The consideration was US$80 mln
• Privatisation transactions with aggregate committed proceeds exceeding US$380 mln were completed or announced
YTD 2008 (including the sale of 51% of Poti Sea Port)
• In April 2008, Georgia has successfully issued US$500 mln debut 5 year 7.5% RegS Eurobond

Recent Government Press Releases

THE GEORGIAN ECONOMY: TAKING CARE OF BUSINESS

THE GEORGIAN ECONOMY: TAKING CARE OF BUSINESS CONT’D

PRIVATISATION PROCEEDS REACHED HISTORIC MAXIMUM IN 1H 2008

M‐O‐M CPI IN JULY 2008 FELL BY 1.2%, Y‐O‐Y PERIOD‐END CPI CHANGE IN SINGLE DIGITS AGAIN

THE GEORGIAN ECONOMY DEMONSTRATES RESILIENCE UNDER EXTREME STRESS

THE GEORGIAN ECONOMY DEMONSTRATES RESILIENCE UNDER EXTREME STRESS CONT’D

ENTREPRENEURIAL ACTIVITY CONTINUOUS TO FLOURISH IN GEORGIA

DEPARTMENT OF STATISTICS OF GEORGIA RELEASES ADJUSTED FDI FIGURES FOR 2007

SOUND BUDGET REVENUE COLLECTION PERFORMANCE IN 1H 2008

Q1 2008 BALANCE OF PAYMENT RESULTS IN LINE WITH EXPECTATIONS

GEORGIAN ECONOMY CONTINUES RAPID GROWTH

GEORGIAN ECONOMY CONTINUES RAPID GROWTH, CONT’D

UNEMPLOYMENT RATE DECLINED IN GEORGIA IN 2007

Georgian Economy - Back in Business 080825

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