Growth: Real GDP growth eased to 5.8% in Feb-23, from 8.4% growth in previous month. Overall, in 2M23, growth came in at 7.1%, remaining robust considering last year’s high base. Our 2023 baseline growth forecast is 4.8% and expect growth at 6.9% if migration impact remains strong. In February, construction, financial, trade, and transportation and storage sectors drove the growth. Meanwhile, manufacturing, real estate and professional activities sectors contracted.
Inflation: Headline CPI retreated to 8.1% y/y in February, marking the 5th consecutive monthly decline. Core inflation also reduced to 6.6% from January’s reading of 7.7%. We expect disinflation to continue, supported by delayed GEL appreciation pass-through and the high base effect of last year. We expect average annual inflation at 5.2% in 2023 down from 11.9% in 2022 and see inflation close to the target by end-23, in our baseline scenario.
Monetary policy: The NBG kept its key rate unchanged at 11.0% at Mar-23 meeting. NBG expects inflation to decline below the 3.0% target in 2H23, due to high base effect. Despite slowdown in inflation, NBG intends to maintain a tight monetary policy amid high uncertainty due to the geopolitical situation, as well as inflationary risks coming from the labor market. We see room for 100bps rate cut in 2H23, as we expect disinflation to continue.
FX: The GEL strengthened by 5.2% vs dollar year-to-date, after gaining 12.5% in 2022. The continued robust growth of external inflows has been the key factor behind the currency’s strength. Notably, NBG purchased US$ 155.2mn in Jan-23 and US$ 85.7 in Feb-23 to build reserves. We see average GEL rate at 2.65 vs dollar in 2023.
