Georgian Economy and Financial Sector. Prepared by TBC Bank Economic Team May, 2018

Transcription

1 Georgian Economy and Financial Sector Prepared by TBC Bank Economic Team May, 218

2 Macro overview Housing market Financial sector structure Credit growth Banking sector Insurance and microfinance sector 1

3 Macedonia Georgia Armenia Luxembourg Croatia Montenegro Denmark Bulgaria Switzerland Slovenia Latvia Albania Ukraine Romania Finland Serbia Azerbaijan Moldova Poland Lithuania Hungary Estonia Sweden France o Top performer across various rankings and one of the lowest tax burden globally Credit ratings 9 th on easiness of Doing Business Fitch : BB-/Positive Standard & Poor's: BB-/Stable Moody's: Ba2/Stable, upgraded from Ba3 on Sept. 217 Government 221 US$ 5 mln Eurobond YTM: 4.55 as of 1-June-218 New Zealand Singapore Denmark International rankings Korea, Rep. 4 Among the friendliest Tax Regime globally From #16 to #9 globally on Ease of Doing Business; From #8 to #4 on Starting a Business #16 in Economic Freedom Index #1 in the region* in Index of Corruption Perception #25 in Business Bribery Risk #5 in Open Budget Index globally 7 admitting paying bribes, among Estonia, Czech rep., Poland, etc. Hong Kong SAR, China United States United Kingdom Norway Georgia Sweden Source: Fitch, S&P, Moody s, Thomson Reuters, World Bank, Heritage Foundation, Trace International, International Budget Partnership, Transparency International *Region refers to CIS and Turkey Total tax rate* as a of profit Source: World Bank s Doing Business Report, th on economic freedom globally Hong Kong Switzerland Ireland Estonia United Kingdom Georgia Lithuania Latvia Romania Armenia Poland Bulgaria Hungary Croatia Source: World Bank, 217 *Reinvested profit became tax free for non-financial corporations since Jan-217 Source: The Heritage Foundation, 218 2

4 o Regional hub Transportation and logistics Favorable location at the gateway between Europe and Asia Tariff free access to c. 2.3 bn market, FTAs with EU, China, CIS, Turkey BTK railway shortest route connecting Chinese and EU markets Anaklia Deep sea port Financial sector From the region only Georgian banks are listed on LSE High transparency of financial services, track record of prudent regulatory practices Potential for capital market development on a regional level Energy Vast hydro resources High level of FDI in Energy sector Nenskra hydro and other small to mid scale HPP constructions Export potential to Turkey Tourism Natural and cultural diversity Fastest growing tourism destination Number of flight connections increasing rapidly Strong government support Potential to become full year destination Healthcare Largest healthcare company listed on LSE Potential for healthcare services export Education Growing number of international students. 23 CAGR of international students over the last 3 years Joint programs with top universities globally Planned development of Kutaisi Technological University with the potential to become largest modern technological education hub in the region o Large infrastructure projects Anaklia Deep Sea Port and City Well positioned to serve trade traffic between EU and Asia Able to accommodate vessels up to TEU 1, Total estimated investment of US$ 2.5 bn, first phase to be completed by 22 Development of the large industrial zone surrounding the port with special tax benefits and modern infrastructure To become regional business destination with different clusters: logistics, light industry, financial, residential, tourism, education, healthcare etc. Nenskra HPP Second largest HPP in Georgia, with installed capacity of 28 MW Total estimated investment of US$1bn Energy generation starting from 219, project to be finalized by 221 Satisfying the energy needs of the fast growing economy Public infrastructure projects Accelerated public investment in infrastructure projects. C. 1 of GDP higher capital expenses planned for 218 compared to 217 Accelerated development of primary roads to support growing tourism and trade traffic Development of secondary road projects connecting main roads to currently hard to access regions to unlock the full tourism and agriculture potential Other transport infrastructure projects South Caucasus pipeline extension (SCPX) project have been 99 completed over 217 and the final testing of infrastructure is underway. SCPX is the part of the Shah-Deniz full field project and once completed will triple the gas volumes exported through the pipeline to over 2bn cubic meters annually Baku-Tbilisi-Kars railway have been officially launched in October, kilometer long railway will represent one of the shortest links between Asia and Europe and is expected to ramp up the transit potential of the country 3

5 Armenia Turkey Romania Georgia Estonia Poland Czech Republic Hungary Kazakhstan Bulgaria EU Ukraine CIS Russia Azerbaijan Georgia Turkey Armenia Ukraine Romania Estonia Poland Kazakhstan Bulgaria Azerbaijan Czech Republic Hungary CIS EU Russia o Fast growing economy due to structural reforms and the recovery in trading partners GDP growth in Georgia and peer regions (YoY) GDP growth in Georgia and weighted average growth of trading partners (YoY) Projections Projections Source: IMF, Geostat *Including Turkey Emerging and developing Europe* Commonwealth of Independent States Georgia Georgia Source: Geostat, National statistical offices of respective countries, IMF Effective GDP GDP growth over 217 in Georgia and peer economies (YoY) Projected GDP growth over in Georgia and peer economies (YoY) Source: National statistical offices of respective countries Source: IMF, WEO, April 218 update 4

6 o Increasing diversification and shift towards EU Exports, tourism, remittances and FDI inflows by origin (share in total) Russian market reopened DCFTA with EU FTA with EFTA, Visa liberalisation with EU FTA with China EU Russia Turkey China USA CIS less Russia Middle East* Other countries Source: Geostat, NBG, GNTA, TBC Bank Economic Team estimates *Middle East countries include: Iran, Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Israel, Egypt, Jordan, Lebanon, Palestine, Syria, Yemen 5

7 o Overall reasonably balanced net exposure to oil prices Inflows from oil exporters vs imports of petroleum products ( of GDP) and oil prices Inflows from oil exporters vs the imports of petroleum products ( of GDP) and oil prices $ FDI Imports of oil and gas Remittances Tourism Exports Net exposure WTI oil price ($ per barrel, RHS) Source: Geostat, NBG, Thomson Reuters, TBC Bank Economic Team estimates Hard currency inflows from oil exporters amounts to c. 2 of GDP, while petroleum imports of Georgia amounts to c. 8 of GDP. Taking into account different elasticities of currency inflows and imports of petroleum products against oil prices, overall net exposure to oil prices appears to be reasonably balanced. For example, possible drop in oil prices should have more proportional impact on petroleum imports rather than on tourism or export inflows. 6

8 Georgia in international rankings o High direct as well as indirect linkages with EU leads to more symmetrical cycles with EUR rather than USD Market GDP* growth in GEL, USD and EUR in Georgia (nominal, YoY) USD EUR GEL Source: Geostat, NBG, TBC Bank Economic Team estimates *GDP excluding agriculture, public administration, and other relatively non-market sectors. This measure have closer correlation with loan book growth EU accounts for around 1/2 of Turkish and around 1/3 of CIS exports, implying that Georgia has also high indirect exposure to EU. Furthermore, oil/commodity exporting countries are expected to be more stable in EUR rather than in USD due to inverse relationship between USD and oil/commodity prices (see next slide). 7

9 1/4/1999 9/4/1999 5/4/2 1/4/21 9/4/21 5/4/22 1/4/23 9/4/23 5/4/24 1/4/25 9/4/25 5/4/26 1/4/27 9/4/27 5/4/28 1/4/29 9/4/29 5/4/21 1/4/211 9/4/211 5/4/212 1/4/213 9/4/213 5/4/214 1/4/215 9/4/215 5/4/216 1/4/217 9/4/ o Inverse relationship between USD and commodity prices appears to be important to consider for commodity exporters EUR/USD and crude oil price (USD per barrel) USD index and commodity price index WTI oil EUR/USD (RHS) Commodity price index (Dec. 1995=1) USD index (Dec. 1995=1, RHS) Source: Thomson Reuters Source: Thomson Reuters 8

10 Georgia in international rankings o However, EUR/USD cycle, exchange rate short term volatility and not-sufficient integration Georgian economy with Euro Area should be taken into account when taking FX exposure of Danske Bank Medium-term Valuation (MEVA) model* Source: Danske Bank, March 218 *Danske banks PPP estimate also suggests similar fair value for EUR/USD exchange rate as MEVA model 9

11 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 o External sector and higher consumer confidence leading growth in 217 Contribution to real GDP growth Consumer and business confidence*, durable consumer goods imports** and GEL/USD exchange rate est.* -5.3 Private consumption Public consumption Investment Net exports Real GDP growth Consumer Confidence Index Imports of durable goods, YoY, GEL Business confidence index GEL/USD exchange rate (RHS) Source: Geostat, TBC Bank Economic Team estimates *Nominal values are adjusted using the CPI inflation Source: ISET PI, Geostat, NBG, TBC Bank Economic Team estimates *ISET consumer and business confidence indices; Detailed methodology can be found on the links: Consumer confidence index, Business confidence index **Nominal imports of durable goods are adjusted by the weighted exchange rate of GEL. Weights correspond to the share of importing countries in total imports of durable goods Despite the fact that USD/GEL exchange rate in Georgia is predominantly important due to the balance sheet mismatch of the borrowers, its volatility also has significant psychological effect on business and consumer confidence. Relative stability of the exchange rate has also contributed to recovery of consumer and business confidence. 1

12 o Stronger growth reflected in wide range of sectors Annual growth of different sectors of the economy (217, constant prices) Structure of GDP (217) Hotels and restaurants 11.2 Construction 11.1 Other services, 2 Trade and repairs, 18 Financial intermediation 9. Trade and repairs 6.6 Transport and communications 6.4 Healthcare, 6 Real estate 6.3 Manufacturing, 14 Manufacturing 3.6 Real estate, 7 Education 3.5 Healthcare Utilities Agriculture, 8 Transport and communications, 1 Agriculture -2.7 Public administration, 8 Construction, 9 GDP growth 5. Source: Geostat Source: Geostat 11

13 Georgia in international rankings o The quality of growth is likely to remain high going forward Average annual contribution to potential GDP growth (percentage points) Share of hired employees in total employment () Productivity Capital Labor Potential growth Source: Liqokeli Akaki. "Estimation of Potential Growth for the Georgian Economy." Economy and Banking, 217, National Bank of Georgia Source: Geostat 12

14 o More jobs created by private sector as a result of inclusive growth Unemployment rate () Share of private sector in employment Source: Geostat, updated methodology in Source: Geostat

15 o Increasing savings and relatively high investment levels Savings, investment and S-I GAP ( of GDP) S-I GAP (CA deficit) Savings Investment Source: Geostat Government plans to introduce pension reform. According to the proposed scheme, pension fund will receive contributions equal to 2 of salary from employer, employee and government. It is expected the pension fund assets to reach around 7 of GDP in 5 years. Pension reform should promote higher savings level in the economy going forward. 14

16 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 EU Poland Czech Republic Bulgaria Hungary Estonia Romania Armenia Georgia Azerbaijan Turkey Kazakhstan Russia CIS Ukraine o Inflation targeting framework with only 3 inflation target Inflation target, refinancing rate, headline and core inflation Average annual inflation over () Headline inflation Refinancing rate Core inflation Inflation target Source: NBG, Geostat Source: IMF WEO, April

17 China Peru Philippines Bulgaria Malaysia Chile Poland Colombia Georgia Hungary India Indonesia Romania Brazil Mexico Pakistan South Africa Russia Turkey Ukraine Argentina Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 o Short term volatility however long term stability of the nominal exchange rate Average annual depreciation over (Dec-213=1) Average annual depreciation against USD over () USD/GEL EUR/GEL TRY/GEL NEER Source: NBG Source: Respective Central Banks 16

18 1/3/214 3/3/214 5/3/214 7/3/214 9/3/214 11/3/214 1/3/215 3/3/215 5/3/215 7/3/215 9/3/215 11/3/215 1/3/216 3/3/216 5/3/216 7/3/216 9/3/216 11/3/216 1/3/217 3/3/217 5/3/217 7/3/217 9/3/217 11/3/217 1/3/218 3/3/218 5/3/218 o Money market developing gradually GEL government bond yield curve 13 Money market rates and monetary policy rate D 3M 6M 1Y 2Y 5Y 1Y TIBR 1 rate MPR Overnight deposits rate Overnight lending rate Source: NBG Source: NBG 17

19 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 1/14/213 1/21/213 2/2/213 2/25/213 3/7/213 4/3/213 4/12/213 5/15/213 5/21/213 5/31/213 6/7/213 6/2/213 7/18/213 8/1/213 8/14/213 9/17/213 9/23/213 11/12/213 11/29/213 12/5/213 12/27/213 1/8/214 1/2/214 1/24/214 2/11/214 2/14/214 8/5/214 8/15/214 8/26/214 12/2/214 2/19/215 3/19/215 9/22/215 11/25/215 1/12/216 1/26/216 3/21/216 4/2/216 5/5/216 5/17/216 5/19/216 6/8/216 8/22/216 9/22/216 1/3/216 1/12/216 4/12/217 6/19/217 6/26/217 8/1/217 4/3/218 Bn US$ Mln US$ o Increasing international reserves Official international reserves (mln USD) 6 4 NBG interventions on FX market (mln USD) Gross international reserves (bn US$) Reserves in months of imports YoY Sales by the NBG Purchases by the NBG Source: NBG, TBC Bank Economic Team estimates Source: NBG 18

20 o Prudent fiscal policy with only 2 weighted average cost of debt Fiscal deficit ( of GDP) Public debt ( of GDP) F Domestic public debt External public debt Total public debt Total public debt (excl. FX effect) Source: MOF Source: MOF, Geostat, TBC Bank Economic Team estimates 19

21 Denmark Finland France Sweden Hungary Slovenia Luxembourg Estonia Poland Ukraine Latvia Bulgaria Lithuania Moldova Switzerland Romania Georgia Macedonia Albania o Low tax burden and increasing share of capital spending Current and capital spending* ( of GDP) General government revenues ( of GDP, 216) F Current spending Capital spending Source: MOF, Geostat, TBC Bank Economic Team estimates *Increase in non-financial assets Source: IMF 2

22 Jan-2 Jun-2 Nov-2 Apr-3 Sep-3 Feb-4 Jul-4 Dec-4 May-5 Oct-5 Mar-6 Aug-6 Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19 May-2 Oct-2 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23 Sep-23 o REER appears to follow trend, productivity growth differential, and is likely to appreciate further Real effective exchange rate of GEL and fitted REER USD/GEL: 2.43 EUR/GEL: REER (22=1) REER - fitted with productivity and GDP per capita differential Linear (REER (22=1)) Source: NBG, IMF, TBC Bank Economic Team estimates Fitted REER is based on the difference between the GDP per capita growth rate in Georgia and weighted average GDP per capita growth in Georgia s trading partner economies. Growth differential is adjusted by the share of non-tradeable sectors in Georgia s GDP to better reflect the impact of growth differential on REER trend. Share of non-tradeable sectors in Georgian GDP is estimated to be in the range of 3-4. Fitted REER given on the chart suggests the existence of Balassa-Samuelson effect for the Georgian economy. Impact of Balassa-Samuelson effect is well documented for most of the Eastern European and other emerging markets, which undergo the relatively fast growth compared to the advanced economies*. *Real Exchange rates in Developing Countries: Are Balassa-Samuelson Effect Present? Similar Estimates for Czech republic can be found on this link 21

23 o Correlation between productivity growth and REER broadly holds on the country level data as well GEL/EUR RER and its fitted trend (22=1) GEL/USD RER and its fitted trend (22=1) Source: NBG, IMF, TBC Bank Economic Team Estimates GEL/EUR RER Fitted GEL/EUR RER Source: NBG, IMF, TBC Bank Economic Team estimates GEL/USD RER Fitted GEL/USD RER GEL/TRY RER and its fitted trend (22=1) GDP per capita growth differential vs RER change (annual average change, ) USD TRY EUR GEL/TRY RER Fitted GEL/TRY RER RER GDP per capita growth differential Source: NBG, IMF, TBC Bank Economic Team estimates Source: NBG, IMF, TBC Bank Economic Team estimates There are important risks that the appreciation trend of effective/bilateral real and nominal exchange rates will not hold in the future: Assumption of higher GDP and productivity growth in Georgia might not hold going forward; Relationship between growth, productivity and REER might be weakened; This relationship is more stable in the long run, in the short term exchange rates at least may be better explained by random walk (Messe, Rogoff, 1983); Actual Inflation may be different from what is assumed in the calculations (3 for Georgia, 3 weighted average for trading partners); Weights of countries are calculated based on trade of goods. It might give more complete picture if tourism and remittances are also counted. Also, weight of commodities in trade should have different treatment rather than country of origin; Relationship is more stable for the currencies that have higher share in Georgia s foreign trade. For example, closer trade relationship with EU, should imply that appreciation trend should be more applicable for GEL/EUR than GEL/USD exchange rate; Using share of non-tradeable sector in total employment or share of non-tradeable goods in CPI basket might give more precise picture to adjust growth differential between Georgia and trading partner economies. 22

24 o Current account deficit historically high, financed mainly by FDIs, similar to some other small open economies Current account deficit ( of GDP) Current account components ( of GDP) Current account Trade in goods Trade in services Income Current transfers CA balance ( of GDP) average Source: Geostat, NBG FDI inflows ( of GDP) Source: Geostat, NBG 2 18 Small Economies large current account deficits ( average) Population (mln) GDP per capita (1 USD) Oil net exports ( of GDP) Countries with large CA deficits (7.3) 4 2 Other countries (2.9) Source: Geostat, NBG Source: IMF, WEO, October

25 Turkey Slovakia Lithuania Russia Slovenia Bosnia Romania Poland Latvia Ukraine Croatia Macedonia Armenia Czech Republic Bulgaria Estonia Serbia Kazakhstan Georgia mln US$ o High levels of FDI demonstrating investors long term commitment FDI inflows by regions** Net FDI inflows to GDP by countries ( average, ) 2, 1,8 1,6 1,4 1,2 1, EU CIS Other of GDP (RHS) Source: Geostat, TBC Bank Economic Team estimates **BP investment included in FDI from EU Share of reinvested earnings in FDI Source: Geostat FDI by sectors (average of ) Reinvested profits became tax free starting from 217, this resulted in significant increase of reinvested earning Hotels and restaurants, 6.3 Other, 12.2 Transport and communications, Real estate, construction, 9.9 Manufacturing and Mining, 15. Source: NBG Average share of reinvested earnings in FDI over Share of reinvested earnings in total FDI Financial sector, 1.7 Energy, 12.8 Source: Geostat *There is no exact breakdown of FDIs by tradeable/non-tradeable sectors, however, from charts above it can be concluded that the share of tradeable sectors is quite high. For example, manufacturing and mining, energy, large share of hotels and restaurants, some share of transport and communications should be considered as tradeable sectors 24

26 o Lower CA deficit and higher growth in 217 GDP growth and current account deficit 15 1 In 217 GDP growth rate and current account deficit both improved YoY change of CA to GDP ratio (PP) YoY change in growth rate (PP) Source: Geostat, NBG Usually GDP growth and CA balance have negative correlation. For example, in 213, GDP growth compared to previous year was lower by 3 PP, while CA deficit to GDP improved by 6. PP. 217 has been unusual in a sense that both improved. Difficult to say whether it is gradual shift to more export oriented growth. On the one hand, tourism is growing with significant positive contribution to CA balance, on the another hand, its likely that import growth will be higher going forward due to the faster recovery in consumption and investment. 25

27 o Strong export recovery across major destinations and products Growth of exports of goods* 7 6 Country/Region Share in exports YoY growth (USD) Export goods Share in exports YoY growth (USD) 5 4 EU Copper ores Q1 218 Russia Azerbaijan Turkey Armenia Ferro-alloys Cars Wines Medicaments Exports (USD, YoY) Exports (EUR, YoY) Exports (GEL, YoY) Others Others Source: Geostat *Depicting foreign trade figures also in GEL and EUR should be informative as significant share of decline of export in USD equivalent was due to its worldwide appreciation Source: Geostat Share of countries in exports of goods EU Russia China Turkey Armenia Azerbaijan USA Ukraine Other Source: Geostat 26

28 o Increasing imports due to higher commodity prices and domestic demand Growth of imports of goods 5 Contribution of different categories of goods to growth of imports (GEL, YoY) Q Q1 218 Imports (USD, YoY) Imports (EUR, YoY) Imports (GEL, YoY) Consumer goods Petroleum products Other Capital and intermediate goods Transportation Total imports Source: Geostat Source: Geostat 27

29 o Growing remittances with more stable sources of origin Remittances Share in remittance inflows Q1 218 Remittances (USD, YoY) Remittances (EUR, YoY) Remittances (GEL, YoY) Russia EU USA Turkey Israel Other Source: NBG Source: NBG 28

30 Azerbaijan Macedonia Turkey Armenia Georgia Italy Georgia, 217 Portugal Switzerland Bulgaria France Albania Spain Luxembourg Greece Estonia Montenegro Cyprus Austria Croatia Malta Iceland Luxembourg Turkey Switzerland France Austria Bulgaria Italy Macedonia Malta Albania Estonia Spain Armenia Portugal Greece Montenegro Croatia Cyprus Azerbaijan Iceland Georgia Georgia, France Italy Turkey Switzerland Macedonia Spain Austria Estonia Portugal Bulgaria Luxembourg Azerbaijan Greece Armenia Iceland Malta Cyprus Albania Georgia Georgia, 217 Croatia Montenegro o One of the fastest growing tourism destinations with further upside Change of tourism receipts to GDP ratio over (PP) Tourism receipts (216, of GDP) Source: World Bank Growth of tourism receipts Source: World Bank Number of tourists to population (216) Tourists per capita:.7 Total foreign visitors per capita: 1.7 Tourists per capita:.9 Total foreign visitors per capita: Q1 218 Tourism receipts (USD) Tourism receipts (EUR) Tourism receipts (GEL) Tourist arrivals per capita International arrivals per capita Source: NBG Source: World Bank 29

31 Macro overview Housing market Financial sector structure Credit growth Banking sector Insurance and microfinance sector 3

32 o Income, mortgage and housing price trend indicate to high supply of housing Real RE prices, real disposable income and mortgage loans (GEL, 28=1) Real disposable income Real RE price Mortgage loans, FX and inflation adjusted Source: NBG, Geostat 31

33 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 o probably driven by substantially increased profit margin, but in the past rather than going forward Real estate price and construction cost* indices (USD, Jan-8=1) Real estate developers (IRR) Up to 218 Going Forward Difference (RHS) RE price index (USD) Construction cost index Source: NBG, Geostat *Construction cost index does not include cost of land and labor Source: TBC Bank Economic Team estimates based on sample Projects under permits issued before 28 were granted VAT exemption in 215, this promoted renewal of previously halted projects and increased supply of housing. At the moment, impact of the regulation should be almost fully completed. Also, government regulation have been tightened, which should further stabilize housing supply going forward. 32

34 Average selling price (USD/p/m2) o With prices probably more undervalued, rather than overvalued GDP per capita vs housing prices (215) Benchmarking of average selling price (USD/p/m2) Kiev Yerevan Tbilisi Batumi Kutaisi Baku Sofia Bucharest Zagreb Riga Vilnius Budapest Tallin Bratislava 2, 4, 6, 8, 1, 12, 14, 16, 18, 2, GDP per capita (USD) Zagreb Tallin Bucharest Bratislava Riga Budapest Vilnius Baku Sofia Kiev Yerevan Tbilisi Batumi Kutaisi Source: IMF, Colliers International 215 Source: Colliers International, 215 Rent to price ratio and USD deposit rate Real mortgage rate and actual and implied value* of rent to price ratio Difference Rent to price ratio Individual deposit rate in USD Rent to price ratio Implied rent to price ratio Estimated real mortgage interest rate Source: NBG Source: NBG, TBC Bank Economic Team estimates Implied rent to price ratio is an estimation of the user cost of housing. This measure includes real mortgage rate, cost of down payment, depreciation cost and expected house price appreciation. Estimations are based on the research paper Is housing overvalued, 214, Ryan Fox and Peter Tulip, Reserve Bank of Australia 33

35 Q1-6 Q2-6 Q3-6 Q4-6 Q1-7 Q2-7 Q3-7 Q4-7 Q1-8 Q2-8 Q3-8 Q4-8 Q1-9 Q2-9 Q3-9 Q4-9 Q1-1 Q2-1 Q3-1 Q4-1 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 o House prices are more stable in GEL and also relatively in EUR, rather than in USD Housing price indices in Georgia (Q1 26=1) Real house price index in Georgia in GEL House price index in USD House price index in Georgia in GEL House price index in EUR Source: NBG Volatility of the change of real estate prices over different time periods indicate that volatility of the price is lower in GEL compared to USD or EUR prices. In addition, volatility of prices is significantly lower in EUR as compared to USD prices. Data analysis also indicate that as time interval increases, prices in GEL and EUR become even less volatile compared to the USD. 34

36 Denmark Sweden UK Cyprus France Germany Estonia Slovakia Czech Republic Italy Poland Lithuania Latvia Croatia Slovenia Georgia Bulgaria Hungary Romania o Strong demand for housing going forward Mortgage loans ( of GDP, 217) Average household size in Georgia Source: ECB, NBG, Geostat Source: Geostat, Colliers international 35

37 o Health of housing market important for the economy and financial sector 217 RE price growth Change of Rent/price Mortgage growth Developers profitability going forward Rent to price relative to yield CA deficit House price and GDP per capita level international comparison Prices relative to growth of income and mortgage growth Change of Share of construction loans in legal entity loans REER Inflation GDP growth Overall assessment Bubble Boom Neutral Downturn Recession Source: UBS, Geostat, NBG, TBC Bank Economic Team estimates Health of housing market is assessed based on the different indicators, given in the table above. Ranges for the variables are defined based on the historical analysis of data and are adjusted using expert judgement. Presented analysis is based on the UBS s Global Real Estate Bubble Index and is adjusted taking into account the data availability. Compared to UBS s methodology, number of additional macro-financial parameters are used to better assess the state of the housing market. 36

38 Macro overview Housing market Financial sector structure Credit growth Banking sector Insurance and microfinance sector 37

39 Netherlands Belgium Euro Area Poland Germany France Italy Estonia Latvia Lithuania Slovakia Slovenia Georgia Denmark UK France Russia Sweden Poland Germany Turkey Czech Republic Slovenia Romania Hungary Italy Bulgaria Estonia Lithuania Georgia Slovakia Latvia Croatia o Georgian financial sector bank centered as in comparable economies Composition of the financial sector, 216 Banking sector, corporate bonds and equity share in total private sector financing**, Deposit taking financial institutions Other financial institutions* Pension Funds Insurance Corporations Bank loans Corporate bonds Equity Source: ECB, report on financial structure, October, 217; NBG *other financial institutions include Investment Funds, Financial Vehicle corporations (FVCs) and money market funds, for Georgia other financial institutions include microfinance organizations Source: World Bank, IMF, ECB, BI,respective central banks **Data shown on the chart is from Q4 217 or latest available. Latest available data for equity was from

40 Slovakia Georgia Estonia Hungary Bulgaria Slovenia Czech Republic Russia Turkey Italy Poland Croatia Germany Denmark France Sweden UK USA Georgia Turkey Hungary Slovenia Sweden Croatia Bulgaria Slovakia Germany Poland Czech Republic Estonia Italy Denmark Russia UK France o with some upside in bond and equity markets, especially in regional context, however bank lending is likely to remain key source of financing Corporate Bonds as a of GDP Corporate bonds by issuer and currency in CEE countries ( of GDP) 3 25 Corp. bonds to GDP in Georgia Source: BIS, TBC Bank Economic Team estimates for Georgia Stock market turnover ratio, 215* Source: Bloomberg (April 214), IMF (213), OeNB FSR, June 214 Potential to become regional financial services hub National Bank of Georgia having the reputation of transparent and prudent regulator High quality of corporate governance in financial sector Further room for bank subsidiaries in region countries Non-residents account for 17 of total deposits, underscoring the high level of trust towards the domestic financial sector. In addition, non-residents hold c. 7 of domestic public debt Potential for regional equity and debt market development, with private bond market showing higher activity recently. Stock market capitalizationm ( of GDP) Stock market turnover ratio () Source: World Bank Financial Development Report, June, 217 *Data refers to 215 or latest available date 39

41 o together with the access to international financial markets Georgian companies well represented on international markets Two largest Georgian banks and the largest healthcare company listed on London Stock exchange. Several public and private bonds listed on international exchanges, attracting debt financing in foreign as well as in local currency. Successful experience of working with foreign investors paves way for more domestic companies to raise debt or equity financing internationally. The inclusion in FTSE 25 index enhances the liquidity of the listed companies Issuer Sector Issue size Coupon Maturity date Yield to maturity Issue rating (Fitch/S&P/ Moody's) Exchange Republic of Georgia Sovereign $5mn Apr BB-/-/Ba2 London Georgian Oil & Gas Corporation Energy $25mn Apr BB-/B+/- London Bank of Georgia Banking GEL5mn Jun BB-/-/Ba2 Dublin Georgian Railway Railroads $5mn Jul B+/B+/- London BGEO Group Georgia Capital Financial - other Financial - other $35mn Jul BB-/-/Ba2 Dublin $3mn Mar /B+/B2 London Issuer Sector Market cap (mln US$) P/E TBC Bank Group Banking 1, BGEO* Banking 1, GHG Healthcare IPO Date exchange 1-Aug Jan Nov- 215 *BGEO group announced demerger into two separate entities: Bank of Georgia and Georgia Capital, two companies will be listed separately on LSE starting from May 29 th LSE LSE LSE Source: Thomson Reuters 4

42 Macro overview Housing market Financial sector structure Credit growth Banking sector Insurance and microfinance sector 41

43 Romania Lithuania Latvia Turkey Slovenia Croatia Slovakia Russia Georgia Hungary Czech Republic Bulgaria Poland Estonia Italy Germany Denmark France o Loan growth strengthens Growth of loans excl. Credo and FX effect 45 Total financing of the private sector ( of GDP 217) State-owned enterprises Other private sector Q Loans to legal entities Total loans Loans to individuals Nominal GDP growth Bank loans External debt of corporate sector Corporate Bonds FDI lending* Equity** Source: NBG, Geostat Source: NBG, Geostat, ECB, IMF, BIS, Worldbank, *FDI lending includes both bank as well as non-bank FDI lending **Data on equity is from

44 Lithuania Romania Slovakia Croatia Latvia Slovenia Georgia Czech Republic Turkey Poland Russia Hungary Estonia Bulgaria Italy Germany Denmark o Business loans and economic growth reinforcing each other Growth of business loans and market GDP (excl. FX effect) 3 Structure of Business funding ( of GDP) State-owned enterprises Other private sector Q Business loans Corporate loans SME loans Market GDP Business lending External debt of business sector Corporate bonds FDI lending* Equity** Source: NBG, TBC Bank Economic Team estimates Source: NBG, Geostat, ECB, IMF, BIS, Worldbank, *FDI lending includes both bank as well as non-bank FDI lending **Data on equity is based on 215 Together with lower demand for loans due to slower growth, after depreciation of GEL, at least some of business borrowers were deleveraging to improve their balance sheet structure. 43

45 o Household debt also on growth path Bank household debt to household disposable income* in Georgia (excl. FX effect**) Total household debt*** to household disposable income by countries BG GEO* LV HN SL CR CZ PL IT SK DE AT FR GR EA BE ES PT FI UK IE SE NO NL DK Non-mortgage Individual entrepreneur Mortgages of non-residents Mortgage Total retail loans to household disp. income 216 Q3 217 Q3 Source:NBG, Geostat, TBC Bank Economic Team estimates *Household disposable income represents the sum of salaries and wages, mixed income, net property income, net current transfers and social benefits (excl. social benefits in kind). In Georgia, due to low level of taxation and high level of remittances, household disposable income as percent of GDP is higher as compared with many other countries **With Dec-217 exchange rate Source: ECB, CNB, NBG, Geostat, Trading economics, TBC Bank Economic Team estimates ***For Georgia excluding bank loans to individual entrepreneurs and including MFI household loans 44

46 o With positive influence on economic growth Effect of household debt on GDP per capita growth () Effect of household debt on GDP growth (Regression coefficients)* Source: IMF October GFSR, Household debt and financial stability Source: IMF October GFSR, Household debt and financial stability *Chart shows impact of the increase of HH debt to GDP ratio by 5 PP in period t and its subsequent impact on GDP growth Changes in household debt have a positive contemporaneous relationship to real GDP growth and a negative association with future real GDP growth, in line with various recent empirical studies. Negative correlation between GDP growth and household debt is mostly driven by mortgage lending while non-mortgage lending does not exhibit significant influence on economic growth. This could be due to the procyclicality of home equity lines or more generally to wealth effects that lead households to cut consumption when the value of their housing assets decline. Housing bubble episodes drive the negative correlation between economic growth, the financial distress and mortgage growth during, as shown currently Georgian residential real estate market does not show any signs of bubble. The short-term positive association between changes in household debt and GDP growth is stronger and the medium-term negative relationship weaker for emerging market economies than for advanced economies. 45

47 o Higher share of consumer debt typical for lower income countries as well as lower income groups within the country Bank debt in of household income, September 216 Debt by loan purpose by income group (Malaysia) GEO CZ Mortgage Non-Mortgage 2.4 Bank loans to individual entrepreneurs (IE) Total bank loans excluding IE Total bank loans including IE Source: CNB, NBG, TBC Bank Economic Team estimates Source: Central bank of Malaysia, 216. Looking Beyond Headline Household Debt Statistics 46

48 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 o Bank household loans having stable quality Non-performing loans to gross mortgage and non-mortgage loans Growth of mortgage and non-mortgage loans (YoY, with Dec-217 FX) Mortgage loans Non-mortgage household loans Mortgage loans Non-mortgage household loans Source: NBG Source: NBG Loan quality* in bank vs non-bank sector Quality of loans is stable/improving in the banking sector, while is has deteriorated in non-bank sector. Introduction of 1 effective interest rate ceiling reduces the risk appetite for lending to the subprime segment. Banks Non-banks Source: Credit Info Georgia *Measured as the number of 3 to 36 days past due loans to number of total loans, excluding the 36 past due loans 47

49 o Countercyclical buffer set at Credit to GDP Credit to GDP excluding FX effect Credit to GDP gap Credit to GDP Credit to GDP trend Credit to GDP gap Credit to GDP w/o FX Credit to GDP trend Source: NBG Source: NBG During the meeting of NBG financial stability committee, on March 3, countercyclical capital buffer was left unchanged at. 48

50 Macro overview Housing market Financial sector structure Credit growth Banking sector Insurance and microfinance sector 49

51 o Small size leading to concentration Small Economies large financial concentration (216) Country HHI (1999) Top 3, (Average ) Top 5, (Average ) GDP, Billion USD (21) Population, mln (21) Countries with share of Top 5 Credit Institutions above 7 Countries with share of Top 5 Credit Institutions below 7 Average Population (mln) Average GDP (billion USD) ,825.4 Finland Switzerland Georgia* Netherlands Israel Belgium Norway Ireland Denmark Greece South Africa Portugal USA , Source: NBG, IMF, ECB, St. Louis Fed, TBC Bank Economic Team estimates Source: Leumi, Geostat *Data for Georgia is for 217 5

52 o enabling higher efficiency with further room for improvement Cost to income ratio* 65 Noninterest expenses to total assets Source: NBG *Noninterest Expense/(Net interest income before LLP + Noninterest Income + Extraordinary + Provisions) Net interest margin on interest earning assets Source: IMF Share of non-interest income in total income Source: IMF Source: NBG, IMF 51

53 o feeding into lower interest rates along with the better risk management and lower cost of funds Loan rate decomposition* (217) Decomposition of breakeven lending rate change in 217 vs Cost of capital Cost of funds Cost of fixed assets Operating costs Interest rate risk Commision income Cost of credit risk Break-even rate *Loan rate decomposition is based on several assumptions, thus the numbers displayed on the chart represent the estimates of TBC Bank Economic Team *TBC Bank Economic Team estimate 52

54 o maintaining solid profitability Return on assets and return on equity 3 7 Sovereign credit rating and banking sector ROE ( average)* AAA AA BBB BB B ROE ROA (RHS) Median Mean Georgia Source: NBG Source: Fitch, S&P, IMF Financial soundness indicators *Countries have been grouped according to their latest credit ratings assigned by either Fitch of S&P, countries with the AA+ and AA- credit ratings are included in AA group; countries with BBB+ and BBB- credit ratings are included in BBB group; countries with BB- and BB+ rating are included in BB group, countries with B- and B+ ratings are included in the B group. Some countries that experienced severe financial sector crises are excluded from the sample 53

55 o Portfolio growth, asset quality and non-interest income driving banking sector profit Decomposition of net profit change from 212 to 217 Source: NBG, TBC Bank Economic Team estimate 54

56 Moldova Ireland Croatia Bulgaria Romania Macedonia Armenia Hungary Poland Czech Republic Latvia France Slovenia Lithuania Denmark Georgia United States Sweden UK Luxembourg Estonia 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 218Q1 o Low and decreasing level of NPLs Non-performing loans to gross loans* (Q4-217 or latest available) 2 Non-performing loans to gross loans - Georgia NPL (IMF) NPL (NBG)** Source: IMF *NPLs are based on the IMF definition and include loans when payments of principal and interest are past due by 9 days or more Source: NBG **NPLs based on NBG methodology include substandard, doubtful and loss loans 55

57 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q3 215Q4 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 217Q4 o Proven track record of sound macro and micro risk management Change of NPL ratio, economic growth and USD/GEL depreciation Change of watch loans ratio, economic growth and USD/GEL depreciation NPLs, YoY (PP) GDP growth USD/GEL cummulative change compared to Jan-211 (RHS) Watch loans to total loans GDP growth USD/GEL cummulative change compared to Jan-211 (RHS) Source: NBG, Geostat Source: NBG, Geostat High dollarization levels increases the vulnerability of the loan book quality towards exchange rate fluctuations, however banks mitigate these risks through more conservative PTI and LTV levels for unhedged FX borrowers. In addition, additional buffers are built in low maturity of loans. E.g. in 214 average remaining maturity of mortgage loans was only around 9 years. 56

58 Sweden France Germany Czech Republic Denmark Romania Lithuania Poland Turkey Slovakia Macedonia Estonia Latvia Bulgaria Bosnia Georgia Croatia Armenia o High liquidity and still strong capital position despite the depreciation impact Loans to deposits and Liquid assets to customer deposits Equity to assets* (, 217) Liquid assets to customer deposits Loans to customer deposits Source: NBG Capital adequacy ratios Source: NBG, ECB, TBC Bank Economic Team Estimates *IFRS adjusted figures New NBG capital adequacy framework Pillar II Source: NBG Regulatory capital ratio (Basel II) Tier 1 capital minimum requirement Regulatory capital minimum requirement (Basel II) Tier 1 capital ratio (Basel II) Pillar I CET 1 (1) 1.5 AT 1 (2) Tier 2 (3) Systemic (4) For more information refer to 216 and 217 NBG annual reports Stress test buffer will be defined as: Max [ (ST ((5)+(6)+(7)+(8)), ] Conservation (5) Countercyclical (6) Concentration (7) CICR (8) Net ST (9) Net GRAPE (1) According to Basel III, In December 217, tier 1 capital minimum requirement was 1.5 regulatory capital and total regulatory minimum requirement was Actual tier 1capital ratio stood at 13.8 and 57

59 o Decreasing dollarization Loan dollarization (with Mar-218 FX) Deposit dollarization (with Mar-218 FX) Q Q1-18 Total loans Individuals Legal entities Total deposits Individuals Legal entities Source: NBG Source: NBG 58

60 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 o High inflation/depreciation risk premium can also be addressed by an introduction of inflation-linked financial products Interest rates on flows of individual term deposits in national and foreign currencies Dollar vs Lari spread on Govt. bonds, retail deposits (TBC) and corporate bonds Govt. bond yields TBC retail deposits rate BOG bond yields Spread GEL deposits FC deposits USD GEL Source: NBG Source: NBG, TBC, BOG, TBC Bank Economic Team estimates 59