Over the last decade, Georgia made impressive progress in reducing corruption, simplifying tax and customs procedures, improving public services, and pleasantly surprised the world when it ensured a peaceful transition of power in late 2012. In July 2013, Georgia and the EU concluded talks on a Deep and Comprehensive Free Trade Agreement (DCFTA) sooner than we expected and the final agreement should be signed once the sides finalize a few procedural issues. Once in place, the agreement will vastly simplify Georgia’s access to EU market, a common-customs zone of about 500mn customers.
The developments suggest the economy is shifting towards new drivers. Heavy investments in infrastructure are positioning Georgia better to realize its potential in transport, tourism, energy, and agriculture. Economic growth has been robust in recent years, with real GDP growing at 6.2% on average since 2004. Growth slowed from end-2012 on pre-election uncertainty and the economy grew only 1.9% y/y in 1H13. FDI remained almost flat, down only 4.3% y/y in 1H13. We expect the economy to resume growth after the presidential elections in October 2013. Despite the impressive growth of the last decade, Georgia’s labour market has not improved much; 15% of Georgia’s population is still unemployed and agriculture is the single largest employer accounting for 53% of the employed population (around 1mn). The financial sector continues to be flush with excess liquidity, which has a multiplier effect once deployed.
The current account deficit dropped to 5.7% in 1H13 from 11.7% in 2012. The C/A deficit decreased in 1H13 by 57% y/y as the negative trade balance in merchandise dropped 19% y/y, while the services trade surplus was up 35% y/y on the back of stronger travel inflows. Over the last several years Georgia experienced a notable increase in exports which grew 109.7% from 2009 to 2012 while import grew only 74.3%. Georgia’s C/A deficit stems from its trade deficit in goods (mostly capital goods), with a surplus in services offsetting almost 40% of the imbalance. Travel inflows started to grow significantly in 2009, reaching US$ 1.4bn in 2012 (9% of GDP) from US$ 476mn in 2009 (4% of GDP). In 2012, new Eurobonds of around US$ 1bn issued by three Georgian companies and non-resident deposits which increased to US$ 230mn (1.5% of GDP) all helped offset the C/A deficit. Half of the C/A deficit had been financed by FDI in the past but the strong growth in travel inflows combined with stable current transfers have more than balanced trade deficit even with no Eurobond issuance in 2013. On the current transfers’ side, remittances have remained stable at around 8% of GDP in the last few years adding 12% y/y in 1H13. YtD exchange rate has remained stable and the National Bank of Georgia has been growing international reserves at unprecedented levels.
External government debt is relatively low at US$ 4.2bn (27% of 2012 GDP) and total government debt at US$ 5.4bn (34% of 2012 GDP). With ample room before reaching the 60% limit stipulated by the Economic Liberty Act, Georgia can tap additional debt to spur economic growth, if needed.
Stable exchange rate, inflation remains subdued. Georgia’s exchange rate is officially floating but in reality it moves in a narrow range with the US dollar. International reserves continue rising, to US$ 3.09bn in 8M13 from US$ 2.87bn at end-2012, partly on the back of increased tourism receipts. In 8M13, the NBG reported net FX purchases of US$ 475mn, or 17% of gross YE12 reserves. International reserves in 8M13 reflect repayments of US$ 205mn to the IMF and other repayments of US$ 48mn. Inflation remains well below the NBG target of 5 % for 2015. Georgia’s y/y deflation as of end September was 1.3%. Subdued inflation and slower economic growth prompted the NBG to ease monetary policy by gradually cutting rates from 8% in June 2011 to the current 3.75%.
Maintaining healthy economic growth is high on the agenda. During 2003-2012, Georgia increased its GDP per capita 3.8x in nominal terms. Georgia should continue to target similar leap as much of the infrastructural and institutional platform has already been put into place. The low point of Georgian Russian relationship which translated into an armed conflict in 2008 is now behind and the situation is moving in the right direction; In May 2013, 9 Georgian companies were given the right to supply wine and mineral water to Russia and it looks like further improvements in trade are on the way.
