Georgia’s flexible exchange rate and economic diversification once again braced the economy against external headwinds in 2016. Growth remained stable at 2.7% while price pressures have been contained with year-end inflation at 1.8% y/y. With the better external environment, economic activity rebounded strongly in 2017 with GDP growth of 4.8% y/y in 2M17. The GEL’s appreciation since mid-February and Georgian citizens’ recently granted visa-free travel to the EU are boosting consumer and business confidence. The government’s four-pillar reform program and related increase in infrastructure spending, alongside new tax exemptions for the corporate sector, are expected to boost investment growth. The better external environment due to firming world commodity prices and the moderate recovery in partner countries’ economies are expected to have a positive impact on goods exports and remittances throughout 2017. Moreover, significant growth in tourism revenues is anticipated with Georgia being a cheap and popular tourist destination, as well as solid FDI of US$ 1.7bn. These factors are boosting the country’s growth outlook, with the economy expected to grow by 4.3% in 2017.
Most resilient economy in the region in 2016. The Georgian economy remained resilient despite the external headwinds hampering performance since end-2014. Growth remained stable at 2.7% y/y in 2016, which we view as fairly solid compared to the country’s major trading partners. The construction sector grew by 8.1% in 2016 as a whole despite the slowdown in 2H16, attributed to the high base in 2015. Importantly, the two largest sectors of the economy posted growth – manufacturing (+4.8% y/y) and trade (+1.8% y/y) – reflecting the recovery in both external and domestic demand, supported by firming world commodity prices and increased remittances in 2H16. Robust tourist arrivals drove the strong 9.9% y/y growth in the hospitality sector. Financial intermediation rose 9.3% y/y. Real estate operations was the other fastest-growing sector at 6.7% y/y despite uncertainties related to GEL depreciation. Transport (-0.7% y/y) and communications (-0.2%) were the only sectors to post a modest contraction in 2016. Growth in agriculture was flat despite various government-supported programs in the sector.
Investments drove growth in 2016; recovering private demand also supported growth in 2H16. Investments increased by 7.9% y/y in real terms in 2016 as FDI related to strategic projects and residential construction increased private investments by 10.5% y/y. Government investments fell 4.2% y/y in real terms, as infrastructure spending slowed significantly in 4Q16. Private consumption recovered in 2H16, bringing the 2016 growth figure to +1.2% y/y. This was supported by growth in remittances since June 2016 and an 18.5% y/y expansion (excluding FX effect) in the retail credit supply. Strong growth in services exports largely compensated drop in goods exports. At the same time, imports recovered in the 4Q. As a result, net exports contribution to GDP was negative 0.9ppts compared to negative 3.7ppts in 2015.
