Executive Summary
Georgia’s economy delivered solid 4.7% growth in 2018, remaining resilient to negative developments in its largest trading partner, Turkey. This growth was supported by booming tourism and a significant increase in exports and remittances. These flows provided positive spillovers to the major sectors of the economy, along with solid growth in the banking sector’s credit portfolio. Meanwhile, the fiscal deficit reduced to 2.5% of GDP and the CA deficit narrowed to 8.0% of GDP in 2018. Importantly, Georgia recorded its first ever current account surplus of 0.3% of GDP in 3Q18 with the CA balance expected to improve further in 2019.
We project GDP growth at 4.5% in 2019, slightly up from 4.3% projected in October 2018, mostly as a result of higher spending on public infrastructure as well as monetary easing. We see risks to growth stemming from domestic factors mostly – possible delays in public infrastructure spending and/or a sharper than projected credit slowdown. Notably, Georgia’s macro fundamentals remain strong with its track record of resilience to negative external developments. This was acknowledged by a one-notch rating upgrade from Fitch in February 2019 and positive assessments of Georgia’s implementation of its ongoing IMF support program.
Price pressures remain contained with annual inflation at 2.3% in February 2019 and annual average inflation at 2.6% in 2018 overall. There is no inflationary risk in sight as household demand is expected to be subdued due to softer consumer lending and low imported inflation. The NBG cut the policy rate in January and March 2019 to support demand and keep inflation near its target of 3.0%.
The GEL depreciated in early August 2018 and has appreciated again since mid-November 2018, following its seasonal pattern. Despite periods of weakness against the USD in 2018, the GEL’s strengthened NEER and REER reflected its gains against the TRY and RUB. This enabled the NBG to purchase nearly US$ 200mn on the FX market in 2018 and US$ 186mn YTD to build up its reserves. With reserve accumulation high on the agenda and new instrument for building reserves activated, we expect the GEL’s seasonal pattern to be smoother in 2019 with the average rate against the US$ higher than the equilibrium rate of 2.5.
Government reforms in recent years – importantly corporate profit tax reform along with VAT refunds – have improved corporates’ financial conditions after suffering GEL depreciation-related losses in 2015-16. The total equity of corporates increased 17.7% y/y to GEL 21.8bn in 2017 – the highest since 2014 – and ROE reached 27.6%. This was also reflected in significant growth of national savings in 2017-18, improving the CA deficit. The newly launched pension fund along with the government’s commitment to reducing the fiscal deficit will also help to raise Georgia’s level of national savings over the coming years. This in turn will likely reduce Georgia’s CA deficit and external debt.
