Currency depreciation in Turkey is raising concerns in Georgia, as many analysts believe that there is a direct link between TRY and GEL. While correlation to the currency of its largest trading partner exists, we argue that it is relatively low and significantly smaller than widely believed.

In recent years, TRY has seen far more rapid depreciation trends than GEL. GEL is however impacted in the short term by TRY through the expectations channel. For example, GEL’s depreciation from September to November 2017 was largely driven by negative expectations amid TRY depreciation – there was no evidence from the trade, tourism or financial channels to explain the development.

Georgia’s exposure (as defined by combination of four channels: exports, tourism, remittances and FDI) to Turkey accounted for only 6.1% of GDP in 2017. Notably, in the 2008-2017 period, exposure to Turkey increased by just 1.9ppts as a share of GDP, while exposure to other countries rose by 20.3ppts. 

Georgia is a well-diversified economy and this minimizes the potential negative impact from turbulence in any particular market. This was illustrated in 2015-2016 when growth in Georgia slowed but remained positive at 2.8% as many of its trading partners entered recessions. Furthermore, Georgia benefits from a stable macroeconomic environment, prudent monetary and fiscal policies, a business-friendly environment, and a healthy banking sector. This is reflected in increasing investment from local and international investors.


Summing up:

  • Given Turkey’s economic structure, dependency on short-term portfolio funds flow, and domestic political developments, TRY has been more vulnerable to USD global strengthening than GEL.
  • Inflation differential between Turkey (double-digits) and Georgia (low single-digits) justifies 6-8% annual outperformance of GEL against TRY in nominal terms.
  • As Georgia enters the busy tourism season, GEL is expected to be stable over the June-September period.
  • The ongoing currency crisis in Turkey may cause GEL to depreciate by 2-3% in the short term via the trade channel (to 2.49-2.52 vs US$).
  • Pressure from TRY weakness will be offset by positive spillovers from Russia and Azerbaijan’s recovery. 
  • We expect the current account deficit to improve slightly to 8.6% of GDP in 2018 (8.7% in 2017) and believe that the fundamental factors affecting GEL remain favorable. We see GEL’s fair value close to 2.4 vs US$.
  • We expect year-end GEL weakness, but we think that volatility will be lower compared to previous years.