Economic growth in Georgia accelerated to 5.4% in 1H18, supported by booming tourism and significantly increased exports and remittances. These flows provided positive spillovers to the major sectors of the economy, but the increased demand also translated into strong import growth and worsened the trade deficit. The growth lost momentum and slowed to an average of 3.3% in July-August, based on GeoStat’s rapid estimates, resulting in 8M18 growth of 4.8%. This slowdown is mostly explained by reduced construction activity due to underspending on government infrastructure projects. Given the current volatility in regional markets and increased external risks, we revise our growth forecast down from 5.4% to 5.0% for 2018. We also expect growth to soften to 4.3% in 2019 mostly due to tighter credit conditions. Importantly, Georgia’s macro fundamentals remain strong given its prudent fiscal and monetary policies and flexible exchange rate. Therefore, we believe that Georgia’s growth outlook remains robust in the face of increased external risks.
Annual inflation remained close to the NBG’s 3.0% target through 9M18, coming in at 2.7% in September. The NBG maintained a moderately tight monetary policy stance due to increased risks from imported inflation in 1H18, cutting the key rate by 0.25bps to 7.0% in July. We expect annual inflation at 2.9% in 2018 and at 3.9% in 2019, reflecting pass-through impact of GEL depreciation and higher world commodity prices. We also anticipate the monetary policy rate to remain at 7.0% until mid-2019.
The GEL has weakened against the USD since August, reflecting deteriorating sentiment toward EM currencies after the TRY collapse. Despite the GEL weakness vs the USD, the GEL’s strengthened NEER and REER since May-18 enabled the NBG to intervene in the FX market and to purchase US$ 112.5mn during the April-September period with the aim to build reserves. We expect the GEL’s seasonal weakness to continue until end-2018, and we see GEL being close to 2.7-75 vs USD till the end of the year, while we see GEL close to 2.5 vs USD in medium term.
The 2019 draft budget reflects the government’s commitment to contain current spending and increase growth-enhancing infrastructure investment. As a result, the fiscal deficit is expected to narrow further to 2.6% of GDP in 2019 – in line with the IMF-supported program.
