Georgia delivered strong economic performance and achieved significant milestones in 2017. It became the ninth easiest place to do business globally, according to the latest World Bank Doing Business report. The resilience of the economy has been acknowledged by a one-notch sovereign credit rating upgrade from Moody’s. Trust in Georgia’s growth model was demonstrated by record high reinvestment by foreign companies in 2017, when the economy grew by an estimated 4.8%. Increased external demand for goods and services originating in Georgia made net exports the main driver of growth in 2017 for the first time since 2013. Tourism posted a stellar performance, with inflows in the sector totaling US$ 2.8bn. The government boosted capital expenditure while the fiscal deficit reduced to 3.9% in 2017 from 4.1% in 2016. Importantly, reinvestment by foreign companies almost doubled and reached c.US$ 600mn in 9M17, indicating investors’ trust in Georgia’s growth model and the success of the profit tax reform introduced in 2017.
Inflation retreated to 4.3% in January 2018, and we expect it to decrease to close to the 3.0% target in 2018 after temporary price pressures seen in 2017. In line with lower inflation, we expect the National Bank of Georgia (NBG) to cut the policy rate by 50bps from the current 7.25%. We also expect the GEL to strengthen to 2.40 vs the US$, which should also lessen price pressures from imported inflation. We think that the NBG will intervene and build reserves to preserve competitiveness in case the GEL significantly appreciates vs the US$.
The government’s commitment to containing current spending growth and increasing the fiscal space for capital spending has been demonstrated by recently approved remuneration law. Moreover, the government has reduced the processing time and administrative procedures for refunding VAT claims. This together with profit tax reform should strengthen the financial position of corporates, increase investment and support private sector-driven growth.
We maintain our GDP growth forecast at 5.4% for 2018. This forecast is based on 1) better-than-expected growth momentum among Georgia’s main trading partners; 2) commencement of large investment projects (Anaklia, Nenskra); 3) acceleration of the positive impact from growth-enhancing reforms by the government; and 4) overall improvement in consumer and business confidence locally. In addition, we see the expected monetary easing as positive for the growth outlook.
