09TBILISI169, GEORGIA: THE ECONOMY IS SAAKASHVILI’S TOP PRIORITY

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Reference ID Created Released Classification Origin
09TBILISI169 2009-01-30 14:42 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO9341
OO RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSI #0169/01 0301442
ZNY CCCCC ZZH
O 301442Z JAN 09
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0866
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000169 
 
SIPDIS 
 
E.O. 12958: DECL: 01/25/2019 
TAGS: ECON ENRG PGOV PREL GG
SUBJECT: GEORGIA: THE ECONOMY IS SAAKASHVILI'S TOP PRIORITY 
 
REF: A. A) 08 TBILISI 2194 
     B. B)08 TBILISI 1912 
     C. C) 08 TBILISI 2119 
     D. D) TBILISI 31 
     E. E) TBILISI 23 
 
Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). 
 
1.   (C) Summary.  Although in better financial shape than 
some of its neighbors, Georgia is starting to suffer from the 
overall international economic malaise.  Georgia's banking 
sector remains sound due to high liquidity and conservative 
lending policies, but experts worry that a likely devaluation 
of the currency could trigger an increase in loan defaults. 
Pressure on the lari remains strong, because the country is 
dependent on dollar-denominated imports.  Unemployment 
continues to rise, in large part due to the difficult state 
of the construction and real estate sectors.  While 
unemployment officially stands at approximately 13 percent, 
actual unemployment is likely much higher.  In the last three 
months, more than 3,000 people have been laid off in the 
banking sector alone due to a decrease in lending.  While the 
initial shock to the Georgian economy came from the August 
conflict with Russia, the threats of the international 
economic crisis could be even more serious.  The government 
understands the threat it faces from economic instability and 
has taken on an aggressive public strategy to address growing 
unemployment and economic uncertainty.  An astute politician, 
President Saakashvili understands the population's 
uncertainty over the economy and is trying to address it. 
Saakashvili recently announced a 2 billion GEL economic 
stimulus package specifically geared at address unemployment 
concerns.  End Summary. 
 
CONTRACTION OF GDP 
 
2.  (C) The impact of the world wide financial crisis is now 
being felt throughout the Georgian economy.  While the 
initial shock to the economy came from the August war with 
Russia, the international economic crisis is bigger and more 
threatening to Georgia, both olitically and economically. 
Prior to the August conflict, Georgia experienced several 
years of double digit GDP growth.  According to the Ministry 
of Finance, growth for the first half of 2008 stood at nine 
percent, and would have been higher had Georgia not 
instituted an aggressive campaign to combat inflation. 
However, due to the August conflict and the resulting drop in 
FDI followed by the global economic crisis, GDP declined in 
the second half of 2008, bringing overall 2008 GDP growth to 
an estimated two percent (Note: official GDP numbers are 
expected in March. End Note).  Initial government and 
international financial institution predictions for 2009 have 
GDP growth pegged between two to four percent. 
 
INFLATION DECREASES, BUT PRESSURE ON THE LARI INCREASES 
 
3.  (C) Inflation for 2008 in Georgia came in at around seven 
percent according to early indicators from the National Bank. 
 This is a significant achievement for the Saakashvili 
government, as year end 2007 inflation totaled 11 percent 
according to the state statistics agency (ref A).  The 
decrease in inflation was the result of a comprehensive 
strategy to tackle creeping consumer price increases.  The 
government's anti-inflation strategy has continued into 2009, 
however, increasing pressure on the lari might require the 
government to back away from these plans.  According to 
conventional economic theory, the current inflation control 
strategy would only work if the government allows the lari to 
float against the dollar.  If the lari is allowed to float, 
the current pressure vis-a-vis the dollar would cause the 
lari to rapidly devalue.  Without a floating exchange policy, 
Qlari to rapidly devalue.  Without a floating exchange policy, 
the National Bank is continuing to spend reserves to meet the 
demand for dollars and keep the exchange rate at its current 
parity. 
 
ADDITIONAL LARI DEVALUATION LIKELY 
 
4.  (C) In the months following the August conflict, the 
Georgian government was able to use reserves to maintain the 
lari-dollar ratio at around 1.45.  However, the National Bank 
was rapidly burning through reserves (ref B) and began to 
worry about running out.  A USD 750 million standby 
arrangement with the IMF helped the situation, as did the USD 
250 million in budget support provided by the United States. 
Even with these dollar inflows, the government devalued (ref 
C) the currency on November 7 to 1.65 GEL per USD.  Even 
while the government vowed to defend this parity, advisors to 
the National Bank, Ministry of Finance officials, and 
commercial bankers have suggested that the amount of the 
devaluation was not enough.  They expect the currency to 
devalue further during the first quarter of 2009.  If the 
government manages the devaluation, which is likely, the lari 
will probably move towards 1.85 per USD.  However, if the 
 
TBILISI 00000169  002 OF 002 
 
 
government was to make the decision to let the lari float, 
even in a managed way, t
he rate could easily reach 2.00 GEL 
to USD. 
 
SERIOUS IMPLICATIONS OF DEVALUATION 
 
5.  (C) In addition to possible inflationary pressures due to 
the increasing real price of imports, the Georgian banking 
sector would be hit hard by a devaluation of the lari. 
According to Ministry of Finance officials approximately 90 
percent of Georgian consumer loans are denominated in 
dollars.  This shifts the currency risk from the lender to 
the borrower.  Many Georgians benefited in 2007 and the first 
half of 2008 from a weakening dollar, effectively decreasing 
the cost of their loans.  The majority of these loans were 
made when the dollar-lari ratio was between 1.45-1.70. 
However, as the lari weakens the cost of servicing these 
loans increases.  If the lari hit 1.95-2.00 per USD, many 
debtors could find themselves unable to pay back the banks. 
The heads of the two major Georgian commercial banks, TBC and 
Bank of Georgia, told EconOff that they are currently within 
their forecasted range for debt rescheduling, however, they 
are worried about managing a serious jump in defaults and 
debt rescheduling.  Neither TBC nor the Bank of Georgia are 
currently lending to consumers beyond a small group of 
well-vetted clients. 
 
UNEMPLOYMENT GROWING 
 
6.  (C) Unemployment has been steadily increasing over the 
last two months.  The construction and real estate sectors 
are the hardest hit in the Georgian economy, with banking 
also experiencing significant challenges.  Georgia's major 
export industries, namely ferral metals and fertilizers have 
also been impacted by decreasing global demand and the 
resulting dip in prices, forcing layoffs.  Many of the blue 
collar workers formerly employed on construction projects 
have found themselves out of work, as have a large number of 
those working in retail banking (ref D).  The Georgian 
Government has vowed to keep unemployment under 14 percent; 
however, some government experts privately estimate 
unemployment at already near 20 percent.  A Ministry of 
Finance official told EconOff in a worse case estimate that 
as many as 250,000 individuals could be added to the 
unemployment rolls in the first quarter of 2008.  According 
to the Georgian Statistics Agency, the labor force totals 1.9 
million and official unemployment is 13 percent, making the 
actual number of unemployed approximately 250,000 people. 
This means that unemployment in the first part of 2009 could 
double.  Add this to an increasing debt load for average 
Georgians, and the situation could be serious. 
 
THE ECONOMY ) THE GOVERNMENT'S ACHILLES HEEL 
 
7.  (C) President Saakashvili recognizes that the real 
domestic challenge for his government in the short term is 
economic.  While repeated polling has shown the population 
has no appetite for new elections or street protests (ref E), 
economic hardship could quickly increase criticism of the 
Saakashvili regime.  In response to this potential threat, 
Saakashvili is working hard to show his government is 
confronting economic challenges to help the Georgian people. 
He announced a two billion GEL economic stimulus package that 
envisions increasing social assistance, while strengthening 
infrastructure investments to create jobs.  In a Georgian 
&New Deal8 of sorts, Saakashvili has pledged to undertake 
serious infrastructure investments, including road, railroad, 
building, and energy-related projects.  According to a 
Ministry of Finance staffer, the infrastructure projects 
Saakashvili touted in his package are nearly all being done 
QSaakashvili touted in his package are nearly all being done 
through assistance pledges following the August war. 
 
COMMENT:  ONLY TIME WILL TELL . . . 
 
8. (C) In the past, Saakashvili let his Prime Minister take 
the lead in economic affairs, but lately the President has 
been personally focused on economic issues.  Georgia finds 
itself at a advantage compared to many of its neighbors 
because its economy is more developed and its banks more 
conservative and liquid.  In addition, the assistance pledged 
following the August conflict gives Georgia a reserve of 
funds that others do not have at their disposal.  If Georgia 
escapes 2008 with GDP growth between zero and two percent and 
can achieve the forecasted two to four percent growth in 
2009, it will likely weather the storm.  However, if the 
global economic crisis continues to worsen, decreasing the 
demand for Georgian exports and lowering FDI coming into 
Georgia, the economy could face a rocky road ahead. 
TEFFT

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