Georgia Healthcare Group PLC Annual Report 2018 Strategic Report Industry and market overview Industry and market overview Georgia’s macro overview business-friendly environment, high governance and access Reform-driven success to 2.8 billion population market without customs duties. Georgia has carried out genuine economic and structural improvements which have been institutionalised. As a result, One of the fastest-growing economies in the region corruption has decreased, starting a business has become second Trust in Georgia’s growth model was demonstrated by record-high easiest in the world, productivity has been enhanced and the reinvestment by foreign companies in 2018. Despite the financial economy diversified – enabling the country to withstand global market turbulence in trading partners’ markets, Georgia remained financial crisis and recent external shocks. Georgia is consistently resilient with inflation at 2.6% in 2018 – very close to the National ranked as one of the top performers in governance and doing business Bank of Georgia’s target of 3.0%. The real GDP growth was 4.7% indicators. Georgia, with a ranking of 6th in Ease of Doing Business, in 2018, averaging 4.5% annually during 2008-2017. The IMF expects is characterised as the top performing economy in the region to start real GDP growth to average 5.1% annually in 2019-2023, making a business. Furthermore, Georgia is ranked 16th out of 180 countries Georgia the fastest-growing economy in the region. by Index of Economic Freedom measured by Heritage Foundation in 2018, and 27th out of 200 countries in the Trace International’s 2018 Georgia is already an established tourism destination. The tourism Matrix of Business Bribery Risk. Georgia is a positive exception to the sector is important part of Georgian economy and is its fastest- trend of high bribery rates in the regional economies and is on a par growing industry and major source of foreign currency inflows. with European Union (“EU”) member states with only 7% of people The sector is a major driver of service export and largest contributor admitting having paid a bribe, according to the 2017 Global Corruption to shrink the current account deficit, which reduced from 8.8% of Barometer study by Transparency International. GDP in 2017 to 7.7% in 2018, according to the preliminary numbers. The number of international travellers to Georgia increased on average As of January 2017, corporate income tax for non-banking and 17% over 2012-2018. Despite the tensions and economic slowdown non-insurance corporations is applicable to only distributed profits; in our major trading countries, international traveller trips increased undistributed profits, reinvested or retained, are exempted. Georgia significantly 8.7 million and brought nearly US$3.2 billion in 2018. has one of the world’s friendliest tax regimes according to the Forbes Tourism outlook remains positive as market diversification continues. Misery Tax Index, having slashed the number of taxes from 21 in 2004 to just six currently. Healthcare services market overview The Georgian healthcare industry has undergone a number of reforms In September 2017, Moody’s upgraded the sovereign credit rating and transformations during the last two decades. The Government of Georgia to Ba2 from Ba3 and maintained the stable outlook. has prioritised healthcare and ensured an influx of private investment. On 22 February 2019, Fitch upgraded the sovereign credit rating The key components of the national healthcare reform were massive of Georgia to BB from BB- with the stable outlook. Based on Fitch, privatisation, infrastructure upgrade, sector liberalisation, introduction the Georgian economy proved resilient to a severe economic shock of the UHC and wider accessibility to healthcare services as the major in Turkey and heightened sanctions risk in Russia in 2018, thanks outcome. Currently, over 75% of the total nationwide hospital bed to a diversification of sources of current account inflows, the floating capacity is new and only c.10% is in the public sector. exchange rate and prudent fiscal and monetary policy settings, underpinned by steadfast adherence to its IMF programme. According to the World Health Organisation (“WHO”), total health expenditure in Georgia in 2000-2014 has demonstrated one of the The growth-oriented Government programme (2018-2020) focuses fastest growth dynamics among the peer group of countries with1 on structural reforms, education and large infrastructural projects CAGR at 11.5%. In relative terms, expressed by health expenditure to promote Georgia as a transit and tourism hub and to enhance as percentage of GDP, Georgia achieved the level of key developed long-term growth. New pension law was adopted in 2018 enhancing economies (c.9% in 2018), which is above most of the peer emerging long-term fiscal sustainability, supporting capital market development, economies. However, there still remains a vast potential for further increasing replacement rate, narrowing current account deficit and increase since Georgia has one of the lowest per capita expenditures rising potential output. on healthcare among the benchmark countries. Healthcare spending per capita is currently at a very low base of only US$324, with annual2 Georgia is the second country in the world, after Switzerland, outpatient encounters of 3.5 per capita and a hospital bed utilisation2 with FTAs with both EU and China rate of only 53%, all significantly lower than many comparable3 The EU-Georgia Association Agreement, that came into force in July countries. Management believes that there are strong prospects 2016, and related Deep and Comprehensive Free Trade Agreement for growth in healthcare expenditure driven by both supply and demand. (“DCFTA”), effective since September 2014, lay solid groundwork to improve governance, strengthen the rule of law and provide more Hospital beds economic opportunities by expanding the EU market to Georgian Notwithstanding a significant improvement in the bed occupancy rate, goods and services. A visa-free travel to the EU, granted to Georgian from 30% in 2003 to 53% currently, there is still potential to increase passport holders in March 2017, is another major success of the efficiency in order to align Georgia with best practices (c.70%). The Georgian foreign policy. FTA with China effective from 2018 and FTA improved efficiency should mainly come from market consolidation. with Hong Kong signed in June 2018 increases opportunities to further New legislative initiatives are being developed (slower than we accelerate exporting markets and to attract investors by offering anticipated) by the state to define hospital types and introduce Key 1 The peer group of countries (or “benchmark countries”) includes both developed and emerging economies: the US, the UK, Poland, Turkey, Russia, the UAE, South Africa, Malaysia, Thailand and India. 2 NCDC 2017. 3 Frost & Sullivan analysis 2017. 28