BANKING NEWS ECONOMIC DIGEST. Bank of Georgia has received an award from The Banker in the nomination Bank of the Year in Georgia.

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1 BANKING NEWS Bank of Georgia has received an award from The Banker in the nomination Bank of the Year in Georgia. Bank of Georgia has won The Banker s award in "Awards of the Banks of 2012", for the nomination "Bank of the Year in Georgia". Founded by The Banker in 2000, the mentioned Bank of the Year Award is given worldwide to leading commercial and investment banks, in order to mark their achievements. ECONOMIC DIGEST NBG Reduces Its Policy Rate by 25 basis points to 5.25% The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 19, 2012 and decided to reduce the refinancing rate by 25 basis points to 5.25 percent. Both annual and core inflation were low in November, with the annual CPI inflation reaching -0.5%, mostly due to the decline in food prices and appreciation of the nominal effective exchange rate in the first half of the year. According to current information the inflation forecast for the coming 6-8 quarters went even lower since the last MPC meeting. According to existing forecast the annual inflation during the coming year is expected to remain below the target (6%).

2 Both annual and core inflation were low in November, with the annual CPI inflation reaching -0.5%, mostly due to the decline in food prices and appreciation of the nominal effective exchange rate in the first half of the year. According to current information the inflation forecast for the coming 6-8 quarters went even lower since the last MPC meeting. According to existing forecast the annual inflation during the coming year is expected to remain below the target (6%). The preliminary economic activity indicators point at the weakening of the demand in November, pushing the price level down. Despite high levels of liquidity and capital in the banking sector, credit activity is still modest, due to low demand for loans. Another factor causing weakening of the demand is the low growth rate of foreign remittances, significantly affected by the current economic situation in Europe. On the other hand, stable growth of tourism income stimulates demand growth. The prices for the main commodities on world markets are stable. Due to the global crisis, the inflation and growth rates in the main trading partners of Georgia are declining. This is an additional factor pushing the price level in Georgia downwards. Given that the inflation will remain below the target in the medium term, the National Bank of Georgia decided to continue monetary softening and to reduce the Monetary Policy Rate. The NBG will continue to monitor the developments in the economy and financial markets and will act accordingly. The next meeting of the Monetary Policy Committee will be held on February 13, According to Heritage Foundation 2013 Index of Economic Freedom Georgia improved its position by 13 steps and ranks 21st amongst 177 economies with 72,2 score and Mostly Free status. In 2012, Georgia was ranked 34th with the score 69,4 and had the status of Moderately Free. Georgia ranks 11th out of 43 countries in the Europe region. According to 2013 Heritage Foundation s evaluation, in a challenging global and regional environment, the Georgian economy has demonstrated a high level of resilience. Access to legal documents has been facilitated, and fiscal consolidation has generated narrowing budget deficits and lower public debt. In 2013 Index of Economic Freedom, Georgia is in the list of top 10 countries in 2 components: Labor Freedom and Trade Freedom and ranks 3rd and 6th positions, respectively. Georgia improved its position in 4 of the 10 components of economic freedoms: Property rights, freedom from corruption, business freedom and investment Freedom. According to 2013 Index of Economic Freedom, Georgia improves its scores in 6 of the 10 components of economic freedoms: Property rights, freedom from corruption, fiscal freedom, government spending, business freedom, investment freedom. Tourism Statistics In 2012, the number of non-resident visitors arrivals at national borders of Georgia equaled to , which is 56% higher compared to the data for the previous year. In January-December 2012, visitors arrivals from Europe (excluded CIS) amounted to (39,6% of visitors), which is 92% higher compared to the same data for the previous year. In 2012, from CIS there were visitors (55,9% of visitors), which is 37% higher too compared to the previous year s same data.

3 In mentioned period, visitors from America reached (0.7% of visitors), with 16% yearly growth. Visitors from Asia countries constituted persons (2,8% of visitors), with 44% yearly growth. Number of African visitors equaled to (0,2% of visitors, 84% yearly growth), number of visitors from Middle East amounted to (0,4% of visitors, 3 times more compared to the same data for the previous year) and from other countries visitors (0,4% of visitors, 6,2 times more compared to the same data for the previous year). Producer Price Index on Freight Transport In December 2012, Producer price index on freight transport decreased by 0,5% compared to the previous year s same indicator. In December 2012, Producer price index on freight transport reached 99,5%. According to the National Statistic Office of Georgia, in the twelve month of 2012, compared to the same period of 2011 port also equaled to 99,5%. During the same period, Producer price index on freight water transport constituted 98,5% (1,5% lower compared to the previous year). During the year, Producer price index on freight air transport didn t change. Commercial Banks of Georgia 77,1% of the total volume of lending of Commercial Banks of Georgia to the legal entities falls only on three sectors - industry, construction and trade. Out of the total volume of lending to the legal entities, the biggest share falls on trade 47% in December, Com-pared with the previous month, in December, 2012 the volume of loans provided for trade decreased by 0,5% (10,1 million GEL) and constituted 2,2 billion GEL. Share of loans provided to the industrial sector constituted 20,9% of all loans to legal entities and amounted to 993,2 million GEL by January 1, 2013 (2,4%, 23 million GEL more compared to the previous month). 9,2% fall on construction, amounting to 435,7 million GEL (9,2%, 36,9 million GEL more, respectively). The volume of lending by commercial banks (including loans to non-residents) in December, 2012, compared to the previous month, increased by 1,6% (by 139,4 million GEL) and exceeded 8,7 billion GEL by January 1, The volume of loans provided in the national currency increased by 2,7% (72,9 million GEL) and the volume of loans in a foreign currency increased by 1,1% (by 66,5 million GEL). By the end of December 2012, commercial banks issued to resident legal entities 889 million GEL worth of national currency-denominated loans (2,5%, 21,8 million GEL more compared to the previous month) and 3,9 billion GEL worth of loans in a foreign currency (1,2%, 44,4 million GEL more). The volume of lending to resident individuals increased by 1,9% (by 66,4 million GEL), during the December 2012, and exceeded 3,6 billion GEL by January 1,

4 GEORGIAN NEWS Georgia s banking sector lending up 2% m/m in December In December, Georgian commercial banks total assets added 2.9% m/m to GEL 14.4bn (US$ 8.7bn), while total equity grew by 3.5% m/m to GEL 2.4bn (US$ 1.4bn). Lending increased by 1.6% m/m to GEL 8.7bn (US$ 5.3bn) and non-bank deposits grew by 2.7% m/m to GEL 7.6bn (US$ 4.6bn). The banking sector posted an aggregate monthly net profit of GEL 18.2mn (US$ 11mn) in December. FY12 merchandise trade deficit increased by 12% y/y Georgia s FY12 foreign trade exports grew by 9% y/y to US$ 2.4bn, while imports added 11% y/y to US$ 7.8bn, widening the foreign trade deficit by 12% y/y to US$ 5.5bn. Azerbaijan accounted for the largest share of Georgia s exports (26%), followed by Armenia (11%) and the U.S. (10%). On the import side, trade was dominated by flows from Turkey (18%), Azerbaijan (8%) and Ukraine (8%). Georgia s money transfer inflows grew 7% y/y in December Total money transfers in December grew 9% y/y to US$ 146mn, as foreign workers sent US$ 134mn in remittances back to Georgia (up 7% y/y). Russia accounted for around 54% of total foreign money transfers in December followed by Greece (12%) and Italy (7%). Georgia s monthly CPI up 0.3% Georgia s monthly CPI grew 0.3% in January, while the annual deflation amounted 1.6% from 1.4% in December. Transportation services was down 0.5% m/m, while food prices increased 2.6% m/m. On an annual basis, food prices are down 2.7% and transportation is also down 0.5%

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