Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Regional instability PRINCIPAL RISK/ The Georgian economy and our business may be adversely affected by regional tensions UNCERTAINTY and instability. The Group’s operations are primarily located in, and most of its revenue is sourced from, Georgia. The Georgian economy is dependent on economies of the region, in particular Russia, Turkey, Azerbaijan and Armenia who are key trading partners. There has been ongoing geopolitical tension, political and economic instability and military conflict in the region, which may have an adverse effect on our business and financial position. KEY DRIVERS/ Russian troops continue to occupy the Abkhazia and the Tskhinvali/South Ossetia regions and TRENDS tensions between Russia and Georgia persist. Russia is potentially opposed to the eastward enlargement of NATO, including former Soviet republics such as Georgia. The introduction of a free trade regime between Georgia and the EU in September 2014 and the visa-free travel in the EU granted to Georgian citizens in March 2017 may intensify tensions between the countries. The Government has taken certain steps towards improving relations with Russia, but, as of the date of this Annual Report these have not resulted in any formal or legal changes in the relationship between the two countries. In June 2018, as a result of early parliamentary and presidential elections, amendments to the Turkish constitution became effective. The amendments which grant the president wider powers are expected to transform Turkey’s system of government away from a parliamentary system which could have a negative impact on political stability in Turkey. There is an ongoing conflict between Azerbaijan and Armenia which impacts the region. MITIGATION The Group actively monitors regional and local market conditions and risks related to political instability, and performs stress and scenario tests in order to assess our financial position. Responsive strategies and action plans are also developed. Despite tensions in the breakaway territories Russia has continued to open its export market to Georgian exports since 2013. While lower global commodity prices and macroeconomic factors have affected Georgia’s regional trading partners, leading to lower exports within the region, Georgia has benefited from increased exports earnings from non-traditional markets such as Switzerland, China, Egypt, Saudi Arabia, South Korea and Singapore. In April 2017, the IMF approved a new three-year US$ 285 million economic programme, aimed at preserving macroeconomic and financial stability and addressing structural weaknesses in the Georgian economy to support higher and inclusive growth. Implementation of the IMF programme is on track, with the authorities achieving all structural benchmarks set for specific periods. On 20-26 February 2019, the IMF staff visited Georgia to discuss the recent economic and financial developments and progress with structural reforms. In their end-of-mission statement, the IMF thanked the authorities for the open and constructive discussions and stated that they are looking forward to continuing the dialogue during the visit for the fourth review of Georgia’s IMF-supported programme in April and May 2019. During 2018, Georgia delivered estimated real GDP growth of 4.8%, whilst inflation was well contained at 1.5% in December 2018, comfortably below the NBG’s target of 3.0% for the year. Tourist arrivals and remittances, a significant driver of Dollar inflows for the country, continued to increase. The country recorded its first ever current account surplus in the third quarter of 2018, an extremely positive macroeconomic development for Georgia. Annual Report 2018Bank of Georgia Group PLC 63