Growth: Economy expanded by 11.0% y/y in Dec-22, after growing by 9.3% y/y in November. 2022 growth came in at 10.1% overall, in line with our expectations. We forecast growth at 4.8% in 2023 and 5.0% in 2024 (see here for more details). In December, the growth was driven by construction, manufacturing, transportation and storage, financial, trade and hospitality sectors. Meanwhile, real estate operations, professional activities and utilities sectors contracted.
Inflation: Headline CPI retreated to 9.8% y/y in December, down from November’s reading of 10.4%. Decelerating energy prices contributed most to ease inflationary pressures along with base effect. We expect food price pressures to ease this year driven by delayed effects of GEL appreciation and reduction in global food prices. We expect average annual inflation at 5.2% in 2023 down from 11.9% in 2022 and see inflation close to target by end-23.
Monetary policy: The NBG kept its key rate unchanged at 11.0% since Mar-22. The regulator believes that inflation has already passes its peak, but intends to keep policy rate at 11.0% until a clear trend of decreasing inflation is observed. We see room for policy rate cut from spring 2023 and expect policy rate at 9.0% at end-23, considering expected deceleration in inflation. We believe that continued global tightening will be transmitted to Georgia and therefore reduction in GEL rates will be necessary to escape overtightening.
FX: The GEL strengthened by 12.5% vs dollar in 2022, and the currency is on a continued appreciation trend since Oct-22. Continued robust growth of external inflows was the key factor behind currency strength. Notably, NBG was net buyer of US$ 564.6mn during 2022 raising international reserves to record high US$ 4.9bn. In baseline scenario, we see average GEL rate at 2.8 vs dollar in 2023 (down from 2.9 in 2022), as FX inflows (including from tourism) remain solid.
