Fitch revises Georgia’s outlook to Stable, affirms at BB
On 6 August 2021Fitch Ratings has revised Georgia’s sovereign credit rating outlook to Stable from Negative and affirmed at BB. Based on Firth the outlook revision reflects a much-improved macroeconomic baseline, and Fitch’s confidence that the Georgian authorities will continue implementing policies supporting macroeconomic stability and medium-term sustainability of public finances. Based on Fitch Georgia navigated the external shock well. A credible policy framework and strong support from official creditors increased external buffers despite higher financing needs. This year’s projected strong economic recovery will help government debt to start declining, while accumulated fiscal buffers will help limit pandemic-related risks. The stronger economic activity has led Fitch to revise up 2021 real GDP by 3.5ppts from its earlier projection, to 7.8% (after a contraction of 6.2% in 2020), implying that output will exceed its 2019 level this year. For 2022-2023, Fitch forecasts real GDP growth to average 5.4%, above potential of 4.0-4.5%, supported by a more robust recovery in the tourism sector and an increase in investment. Risks surrounding the pandemic, pace of vaccination roll-out, and upcoming local elections in October, pose downside risks to macroeconomic baseline based on Fitch.
Inflation was 11.9% y/y and 1.3% m/m in July 2021
Annual CPI inflation came in at 11.9% in July 2021, after a 9.9% inflation in previous month, according to Geostat. Core inflation (non-food, non-energy) was 6.4% and core inflation excluding tobacco was 6.3% in July. By categories, annual inflation was mainly driven by price changes in food and non-alcoholic beverages (+14.1% y/y, +4.43ppts), transport (+22.5% y/y, +2.65ppts), housing, water, electricity, gas and other fuels (+11.1% y/y, +1.65ppts), health (+11.4% y/y, +0.89ppts), furnishings, household equipment and maintenance (+11.5% y/y, +0.62ppts) and alcoholic beverages and tobacco (+7.1% y/y, +0.46ppts) categories. On a monthly basis, there was 1.3% inflation in July 2021, reflecting price increase in food and non-alcoholic beverages (+3.2% y/y, +1.02ppts) category.
NBG raises key rate to 10.0%
The NBG increased the key rate by 0.5ppts to 10.0% on 4 August 2021, citing “unexpectedly high” inflation of July at 11.9%. The regulator commented that the driving forces of high inflation are predominately one-off and independent from monetary policy. The major ones are the sharply increased prices of food and oil in international markets. In addition to the temporary factors, domestic demand has significantly increased – economic growth was 12.7% in 1H21 and for 2021 NBG revised the growth projection upwards to 8.5% from 4.0%. The NBG expressed concerns that the high inflation can lead to a surge in inflation expectations, and therefore the regulator intends to keep a tight policy stance for a medium-term, not ruling out further hikes. With such a policy and the expected fade-out of one-off exogenous factors, NBG expects inflation to decline in 2022. The next committee meeting is scheduled for 15 September 2021.
International reserves at US$ 3.9bn in July 2021
Gross international reserves increased by 0.8% y/y to US$ 3.9bn in July 2021 according to NBG. On a monthly basis, the reserves were down by 1.2% (-US$ 45.7mn). Changes in reserves were attributed to the government and banking sector FX operations, and/or asset revaluation.
