Executive Summary
The Georgian economy gained traction quickly in 1H17, growing by 4.5% as external demand stabilized and the government initiatives strengthened consumer demand and business confidence. This is a meaningful acceleration, following subdued growth in 2015-16 due to weaker external environment.
In 1H17, combination of goods export growth, robust tourist arrivals, recovery in remittances and modest increase in imports improved the current account deficit and stabilized the currency.
Price pressures have re-emerged in 2017 due to one-off factors related to excise tax hikes, and annual inflation came in at 7.1% in June. The NBG reacted by moderately tightening monetary policy, raising the policy rate to 7.0% from 6.5% at end-2016. However, the price pressures are likely to be transitory, and we expect no further rate hike this year. We also expect inflation to decline rapidly in 2018 toward the 3.0% target once the effects of the excise tax increases fade.
Better-than-expected growth strengthened the government’s fiscal position in 1H17. With growth expected to remain above the budgeted level, the government is in a position to deliver its planned fiscal stimulus without jeopardizing the fiscal accounts and maintain fiscal discipline as agreed with the IMF.
The GEL strengthened in 1H17, reflecting favorable external conditions and the related uptick in growth. The National Bank intervened with close to US$ 90mn purchase in 1H17 to curb the GEL’s appreciation pressure. Our calculations suggest that the currency’s fair value against the US$ is close to 2.35 and that it is currently slightly undervalued. We do not expect any dramatic movements this year and see the GEL at 2.3 versus the US$ in the medium term.
Contrary to expectations, the Georgian economy hasn’t suffered from recent economic uncertainties in Turkey. The trade balance with Turkey improved by 13.0% y/y in 1H17 despite the GEL’s real appreciation against the TRY. Investments from Turkey rose by 42.1% y/y in 1Q17 and we expect solid US$ 300mn FDI from Turkey this year. Remittances also continue to grow. While tourist arrivals from Turkey fell by 15.9% y/y in 1H17, this was more than offset by the strong growth in arrivals from other countries.
We revise our 2017 GDP growth forecast up to 4.7% from 4.3%, as we expect the government’s budgetary focus on infrastructure spending and corporate tax reform to boost investments.
