Executive Summary

Georgia has been experiencing a pick-up in growth in 2017 on the back of stronger economic performance of its major trading partners and an improved business environment locally. Exports, tourism revenues, and remittances rose significantly. The resulting boost in net exports and domestic demand drove growth, with real GDP expanding 4.9% in 10M17. Fiscal policy supported growth as the government boosted capital spending, while current spending was contained. The fiscal deficit narrowed as revenues overperformed due to better-than-expected growth. Georgia’s business friendly environment continues to attract foreign investors, with FDI reaching all-time high in 9M17, while strongly growing tourism revenues and recovery in goods exports help the current account deficit to narrow.

The National Bank of Georgia raised its monetary policy rate three times in 2017, bringing it from 6.5% to 7.25% to tackle rising inflation expectations. Annual inflation increased to 6.9% in November 2017, largely reflecting the effect of higher excise taxes. We expect inflation to decline in 2018 toward the NBG’s target of 3.0%, once the effects of the excise tax increases fade. 

The GEL partly gained its value against the US$ without central bank interventions. The GEL’s recent weakness has been seasonal, predominantly driven by negative expectations built up over the past three years. This, however, reversed in December due to foreign funds inflow. Our calculations suggest that the GEL is currently fairly valued against the US$. As both short and medium-term fundamental factors affecting the GEL remain favorable, we expect the currency to strengthen to 2.4 vs the US$ in the medium term.

The 2018 budget reflects the government’s commitment to restrain current spending and increase growth-enhancing infrastructure investment. As a result, the fiscal deficit is expected to narrow to 3.0% of GDP in 2018, in line with the IMF-supported program.

We revise our 2017 GDP growth projection up to 5.0% from 4.7%, and forecast 5.4% growth in 2018. Our outlook is based on continued recovery in Georgia’s main trading partners, a sustained reform program targeting higher capital spending and an enhanced business climate. We also expect the country’s prudent macroeconomic policy framework to remain steady.