External Sector Remains Balanced Despite Reduction in Tourism Inflows

In Q2 2019, the CA deficit-to-GDP ratio declined sharply to 3.2%, as opposed to 8.2% of the same figure a year ago. The bulk of the improvement reflected a reduction in the trade deficit, while higher services exports and an improved income account also contributed positively.

Overall, the long-standing correlation between the level of FDI and the CA deficit seems to be driving a significant part of the change in the CA balance.

Despite Russia’s flight ban and the consequent reduction in tourism inflows, the external sector remained balanced in July-Aug 2019. According to the initial estimates of the central bank, the reduction of tourism inflows amounted to around 100 million USD over the same period, which was well offset by an improved balance of trade in goods as well as by increasing remittance inflows. The decline of inflows is also partially explained by the GEL depreciation as tourists appear to spend less in USD terms when the GEL is weaker.

Given the seasonality of tourism receipts, it can be argued that the impact of sanctions will likely be lower as the high season is nearing an end. Also, the decline  from Iran should be moderate in coming months as the base effect comes into play. On the other hand, the declining inflows from these countries is increasingly being offset by higher number of visitors from the EU and Middle East, who usually spend more per trip. In addition, the chances of Russia’s flight ban being lifted has increased substantially taking into account recent
statements made by high-level Russian officials. Although the global outlook has worsened since the previous monthly update, on the positive side, the signs of recovery in the Turkish economy have become even stronger. Recently, the IMF sharply increased its projected growth for Turkey from -2.5% to a positive 0.25% for 2019. Additionally, growth in Russia has somewhat strengthened.

International financing conditions remain favorable as interest rates in USD continue to decline. At the same time, despite some signals of a weakening US economy, the dollar maintains a strong position, which can mostly be attributed to its safe haven status. The
increasing interest rate differential between GEL and USD rates, along with a sharply undervalued GEL creates attractive opportunities for investors with the USD as a
functional currency to benefit from both channels. Historically, the share of non-residents in Georgian treasuries has been strongly correlated with USD longterm yields.

TBC Research