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Georgian Economy - Exposure to Turkey Lower than Broadly Believed

28 May, 2018

Currency depreciation in Turkey is raising concerns in Georgia, as many analysts believe that there is a direct link between TRY and GEL. While correlation to the currency of its largest trading partner exists, we argue that it is relatively low and significantly smaller than widely believed.

In recent years, TRY has seen far more rapid depreciation trends than GEL. GEL is however impacted in the short term by TRY through the expectations channel. For example, GEL’s depreciation from September to November 2017 was largely driven by negative expectations amid TRY depreciation – there was no evidence from the trade, tourism or financial channels to explain the development.

Georgia’s exposure (as defined by combination of four channels: exports, tourism, remittances and FDI) to Turkey accounted for only 6.1% of GDP in 2017. Notably, in the 2008-2017 period, exposure to Turkey increased by just 1.9ppts as a share of GDP, while exposure to other countries rose by 20.3ppts. 

Georgia is a well-diversified economy and this minimizes the potential negative impact from turbulence in any particular market. This was illustrated in 2015-2016 when growth in Georgia slowed but remained positive at 2.8% as many of its trading partners entered recessions. Furthermore, Georgia benefits from a stable macroeconomic environment, prudent monetary and fiscal policies, a business-friendly environment, and a healthy banking sector. This is reflected in increasing investment from local and international investors.


Summing up:

  • Given Turkey’s economic structure, dependency on short-term portfolio funds flow, and domestic political developments, TRY has been more vulnerable to USD global strengthening than GEL.
  • Inflation differential between Turkey (double-digits) and Georgia (low single-digits) justifies 6-8% annual outperformance of GEL against TRY in nominal terms.
  • As Georgia enters the busy tourism season, GEL is expected to be stable over the June-September period.
  • The ongoing currency crisis in Turkey may cause GEL to depreciate by 2-3% in the short term via the trade channel (to 2.49-2.52 vs US$).
  • Pressure from TRY weakness will be offset by positive spillovers from Russia and Azerbaijan’s recovery. 
  • We expect the current account deficit to improve slightly to 8.6% of GDP in 2018 (8.7% in 2017) and believe that the fundamental factors affecting GEL remain favorable. We see GEL’s fair value close to 2.4 vs US$.
  • We expect year-end GEL weakness, but we think that volatility will be lower compared to previous years.

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Georgian Economy - Growth Gaining Momentum

25 May, 2018

The Georgian economy delivered strong 5.2% y/y growth in 1Q18, fueled by firmed external demand. Goods exports, tourism revenues and remittances continued their strong double-digit growth rates. Government capital spending, which more than doubled y/y, and increased reinvestments by businesses were other growth drivers. Improved consumer sentiment supported bank loans to increase 21.6% y/y excluding FX effects.

Inflation decelerated sharply to 2.5% in April 2018 once excise tax effects faded. The NBG has kept its policy rate at 7.25% since the start of the year as it believes that the factors affecting inflationary risks have not yet sufficiently weakened. The NBG considers the policy rate cut in 2H18 and expects annual inflation to remain close to the 3.0% target level in 2018. It purchased US$ 20mn in April, limiting the GEL’s appreciation vs the USD. Macroeconomic factors affecting GEL remain favorable and considering Georgia entering active tourism season we expect the GEL to be close to 2.4 vs the USD in the medium term, despite current volatility in major trading partners’ currencies. We think that the NBG will continue purchasing FX in case the GEL appreciates significantly against its major trading partners’ currencies.

Based on 1Q18 fiscal data, the government remains committed to containing current spending growth and capital spending acceleration. We believe that the fiscal deficit will reach 2.8% of GDP in 2018 as agreed with IMF.

We maintain our forecasts and expect GDP growth of 5.4% for 2018. Our projection is strengthened by favorable external conditions, ongoing government reforms and improved consumer and business confidence locally. However, risks to growth may still come from the external sector.


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Georgian Economy - Empowering Private Sector to Drive Growth

22 Feb, 2018

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.


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Georgian Economy - Better than Expected Growth

21 Dec, 2017

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.


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