The Georgian economy delivered strong 5.2% y/y growth in 1Q18, fueled by firmed external demand. Goods exports, tourism revenues and remittances continued their strong double-digit growth rates. Government capital spending, which more than doubled y/y, and increased reinvestments by businesses were other growth drivers. Improved consumer sentiment supported bank loans to increase 21.6% y/y excluding FX effects.
Inflation decelerated sharply to 2.5% in April 2018 once excise tax effects faded. The NBG has kept its policy rate at 7.25% since the start of the year as it believes that the factors affecting inflationary risks have not yet sufficiently weakened. The NBG considers the policy rate cut in 2H18 and expects annual inflation to remain close to the 3.0% target level in 2018. It purchased US$ 20mn in April, limiting the GEL’s appreciation vs the USD. Macroeconomic factors affecting GEL remain favorable and considering Georgia entering active tourism season we expect the GEL to be close to 2.4 vs the USD in the medium term, despite current volatility in major trading partners’ currencies. We think that the NBG will continue purchasing FX in case the GEL appreciates significantly against its major trading partners’ currencies.
Based on 1Q18 fiscal data, the government remains committed to containing current spending growth and capital spending acceleration. We believe that the fiscal deficit will reach 2.8% of GDP in 2018 as agreed with IMF.
We maintain our forecasts and expect GDP growth of 5.4% for 2018. Our projection is strengthened by favorable external conditions, ongoing government reforms and improved consumer and business confidence locally. However, risks to growth may still come from the external sector.
