The effectiveness of Georgia’s institutional setting and growth model has been demonstrated once again in 2015 – despite external pressures, macro stability has been maintained and the banking sector is on solid footing. The economy appears to have turned the corner since Feb-16, following a relative slowdown in the previous two months, which was a result of the latest regional and global turbulence. Tax revenues increased 14.1% y/y, after a slight dip in the previous month, while tourism arrivals delivered a stellar performance, increasing 23.9% y/y in Feb-16. New government initiatives to boost growth and the appointment of a new central bank governor reinvigorated business confidence. Improved sentiment translated into a stronger GEL, which has outperformed its major trading partner currencies in Mid-March, prompting NBG to intervene on the FX market and purchase US$. A pick-up in oil prices and the associated improvement in economic prospects for Georgia’s major trading partners also contribute positively to the country’s economic outlook. With external downside risks lessened along with sound domestic fundamentals, we see potential for up to 5.0% growth in 2016.
The Georgian economy seems turning the corner in February 2016. Output expanded 2.8% y/y in 2015, with all sectors in the green except manufacturing (-4.9% y/y), which was negatively affected by reduced production of beverages and tobacco due to an excise tax increase and a marginal drop in trade (-0.3% y/y). Investments remained the main engine of growth, with FDI hitting US$ 1.4bn (9.7% of GDP). Construction posted strong double-digit growth (+15.2% y/y), thanks to the new gas pipeline construction by BP and a pick-up in public infrastructure spending. The growth trend slowed in Dec-15 and Jan-16 on the back of various global and regional headwinds, after 5.3% y/y growth in Nov-15. However, sound fundamentals kept the economy on track to return to normal growth. In February, tax revenues were up 14.1% y/y and tourism arrivals posted spectacular growth (+23.9% y/y).
Price pressures are manageable. Annual consumer inflation was recorded at 5.6% in Feb-16, unchanged from the previous month and slightly above the central bank’s target of 5.0%. Drivers of price growth remain unchanged since Apr-15: depreciation-related pass-through effect, one-off increase in the electricity tariff in Aug-15, and excise tax increases on tobacco and alcoholic beverages. With a decrease in inflation expectations, NBG kept its policy rate unchanged at 8.0% at the two monetary committee meetings this year. Low world commodity prices on oil and food, weaker demand, and tighter monetary policy have kept price pressures manageable. We see inflation decelerating to below the NBG target starting Apr-16, as transitory factors dissipate.
