Georgian economy quickly regained COVID crisis losses in 1H21 helped by pent-up demand, strong goods exports, solid remittances, and ongoing recovery in tourism. Investments also expected to contribute positively to growth in 2021 boosted by public infrastructure spending along with increased private sector activity (corporate lending accelerated markedly from April). Real GDP growth came in at 12.7% y/y in 1H21, which is also 5.7% higher vs. 1H19 level, beating market expectations. We now expect 2021 real GDP growth at 8.6% up from 7.0% projected in June. We incorporate risks related to COVID pandemic and related impediments in economic activity in this growth projection. Inflation in Georgia remains elevated, with annual inflation at 11.9% in July. In our baseline scenario, we expect average inflation of 9.5% in 2021, up from previous 6.9% forecast. The rise in global food and oil prices and higher utility tariffs are an important factors driving inflation higher along with GEL depreciation pass-through and strong demand. The NBG raised the key rate further in August supporting the GEL to remain relatively strong in our view, as the regulator has limited ability to influence global inflationary pressures or household demand now. Uptick in growth also supported healthier fiscal parameters (lower deficit and debt), reflected in revised budget document. For 2022 we forecast growth to remain solid at 5.7% and see need for bold structural reforms to support strong growth momentum from 2023.
