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TBC Research Reviews Georgia’s Economy

TBC Research has published a monthly update on Georgia’s economy. In spite of lower global growth projections and expected recession in Turkey probably won’t have as much impact on Georgian economy, due to lower dependency on Turkey. 

GDP growth

According to the initial estimates of Geostat, real GDP growth accelerated to 5.6% YoY in December 2018 following the 2.2% YoY increase in November 2018. Manufacturing, construction, hotels and restaurants and real estate contributed positively to economic activity, while utilities, transport and financial intermediation had negative impact. Acceleration of growth in December likely reflects the higher growth of exports in categories with larger share of domestic value added, positive impact of lower oil prices as well as the stronger public spending in November and December. While the budget expenditures growth was sizeable in December, this was mostly due to the advance payments and the full impact of the spending on growth will be materialized later in coming months with the strongest effect likely in Q2 2019. At the same time, contrary to what was implied by stronger fiscal spending, further decline of imports in almost all categories indicates that domestic demand remained weak. Similar conclusion can be drawn from somewhat slower credit growth, especially on MoM seasonally adjusted terms, and NBG buying reserves at around 4.0% of GDP in December.

Overall, growth amounted to 4.8% in 2018 — very solid performance taking into account contractionary fiscal stance and negative contribution of the developments in
Turkey.

External Environment

In IMF’s January update of the “World Economic Outlook” global growth projections was revised downwards. ECB as well as Fed turned more dovish in their latest statements. Stronger than expected recession is projected in Turkey, however, possible impact of any adverse developments will likely be more limited on Georgia as the exposure to Turkey has diminished substantially throughout 2018. While lower oil prices appear to have moderately negative impact on inflows, Georgia’s bill on oil imports continued to decline.

Fiscal Sector

As a result of the accelerated spending mostly in form of advanced payments by the end of 2018, budget deficit stood at 1.3 bn GEL in December with the full year deficit figure amounting to 1.1 bn GEL, an estimated 2.6% of GDP.

Trade in Goods

Gross exports of goods in USD terms rose by 14.0% YoY, while imports went down by 2.7% YoY in December. Decline of imports was evident in almost all categories of goods. Trade balance improved in second consecutive month in December.

Tourism

Number of tourists went up by 11.6% YoY in December 2018. Growth of tourists remained highest from the EU with share in tourism inflows reaching almost 10% in 2018. Visitors also increased somewhat from CIS while declined from other countries driven by Turkey and Iran.

Remittances

Remittance growth remained largely unchanged from the previous month and stood at 9.1% in December with largest contribution and share from the EU.

Loan Growth

Bank lending growth slowed to 17.2% YoY in December 2018 from 18.9% YoY in previous month caused by continued slowdown in non-mortgage retail lending as well as some moderation of business loans.

Monetary policy

National Bank of Georgia decreased the policy rate by 0.25PP to 6.75%. According to NBG, further rate cuts could follow depending on the domestic demand as well external sector developments.

Inflation

Annual inflation increased to 2.2% in January 2019 base effect and higher excise taxes on tobacco having the strongest impact.

Exchange Rates

Despite strong appreciation pressures, estimated GEL REER remained broadly unchanged also in January 2019 reflecting the NBG’s record high interventions. As of February 1, estimated GEL REER remained below its long term trend as well as medium term average.

FX interventions

On the back of reasonably strong inflows, lower oil prices and likely weaker domestic demand, NBG continued to refill international reserves and purchased 85 mln USD in January, equivalent to an estimated 8.0% of the same month GDP. Sizeable USD purchases likely already in January brought NBG’s reserves above the June 2019 NIR limit set by the agreement with the IMF. Also, NBG introduced new tool for FX interventions in form of FX options.

Source – TBC Research