The Georgian economy grew 2.5% y/y in 5M15 against a backdrop of regional turbulence, characterized by falling oil prices, currency depreciations, and negative spillover from Russia’s recession. The resulting lower remittances and exports, coupled with increased private consumption, exacerbated external imbalances in 1Q15, pressuring the GEL. With limited FX intervention, the NBG allowed the exchange rate to absorb most of the shocks while relieving the pressure on the real economy. Exchange rate flexibility precluded sizable reserve losses, and greater policy transparency supported stronger market fundamentals compared to other regional economies. The weaker GEL has been taking a toll on imports since April. This, coupled with a spike in tourist arrivals, has moderated the depreciation pressure, and the GEL has stabilized. Despite high dollarization, NPLs remain under control at 3.4%, and financial intermediation is stimulating the economy. Falling oil prices contained inflation in 1H15, though expectations of higher inflation in 2H15 spurred the NBG towards monetary tightening by increasing the policy rate to 5.5% on 1 July. Despite the slower growth, tax revenues increased 11.9% y/y, and were above the budgeted amount in 1H15. However, faced with lower growth than previously anticipated, the government revised the 2015 budget with the aim of maintaining the deficit target of 3.0% of GDP. Overall, economic diversification and timely policies, along with the floating exchange rate regime, have helped Georgia to emerge from the regional turmoil relatively unscathed. Despite a lower growth outlook and substantial external risks, Georgia has managed to keep its macro fundamentals healthy, which will provide a base for a quick pickup once regional turbulence subsides.
Economic growth decelerates to 2.5% in 5M15, though still appears healthy in the regional context. Against the backdrop of regional turbulence related to falling oil prices, currency depreciation, and negative spillovers from Russia’s slowdown, Georgia performed well in the regional context, with its GDP expanding 2.5% in 5M15. While the growth is low by Georgian standards and external risks shape the growth outlook, medium to long term economic fundamentals remain strong, supporting a still positive (albeit weaker) outlook.
Private consumption continues upward trend despite depreciation, with investment driving growth in 1Q15. The positive trend in private consumption continued despite depreciation related uncertainty, rising 4.1% y/y in 1Q15, fueled by credit growth. Private investment, accounting for 90.3% of total investment, increased 22.0% y/y, driving growth in the quarter. Public investment increased 73.4% y/y in 1Q15, though from a lower base.
Strong private demand intensifies external imbalances in 1Q15; current account deficit widens to 14.1% of GDP, pressuring the GEL. Private consumption growth fed imports in 1Q15, preventing external adjustment. Imports fell 7.3%, mainly due to lower fuel prices. Unlike imports, exports shrank a significant 26.0% y/y in 1Q15, resulting in the trade deficit increasing 14.2% y/y. This, combined with tumbling remittances (-26.1% y/y) and weaker tourism proceeds (-2.9% y/y), pressured the GEL. As a result, the current account deficit widened 4.0ppts y/y to 14.1% of 1Q15 GDP.
