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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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Georgian Economy - Clear Skies and Tailwinds

8 Aug, 2017

Executive Summary‚Äč

The Georgian economy gained traction quickly in 1H17,
growing by 4.5% as external demand stabilized and the government initiatives strengthened consumer demand and business confidence. This is a meaningful acceleration, following subdued growth in 2015-16 due to weaker external environment.

In 1H17, combination of goods export growth, robust tourist arrivals, recovery in remittances and modest increase in imports improved the current account deficit and stabilized the currency.

Price pressures have re-emerged in 2017 due to one-off factors related to excise tax hikes, and annual inflation came in at 7.1% in June. The NBG reacted by moderately tightening monetary policy, raising the policy rate to 7.0% from 6.5% at end-2016. However, the price pressures are likely to be transitory, and we expect no further rate hike this year. We also expect inflation to decline rapidly in 2018 toward the 3.0% target once the effects of the excise tax increases fade.

Better-than-expected growth strengthened the government’s fiscal position in 1H17. With growth expected to remain above the budgeted level, the government is in a position to deliver its planned fiscal stimulus without jeopardizing the fiscal accounts and maintain fiscal discipline as agreed with the IMF. 

The GEL strengthened in 1H17, reflecting favorable external conditions and the related uptick in growth. The National Bank intervened with close to US$ 90mn purchase in 1H17 to curb the GEL’s appreciation pressure. Our calculations suggest that the currency’s fair value against the US$ is close to 2.35 and that it is currently slightly undervalued. We do not expect any dramatic movements this year and see the GEL at 2.3 versus the US$ in the medium term.

Contrary to expectations, the Georgian economy hasn’t suffered from recent economic uncertainties in Turkey. The trade balance with Turkey improved by 13.0% y/y in 1H17 despite the GEL’s real appreciation against the TRY. Investments from Turkey rose by 42.1% y/y in 1Q17 and we expect solid US$ 300mn FDI from Turkey this year.  Remittances also continue to grow. While tourist arrivals from Turkey fell by 15.9% y/y in 1H17, this was more than offset by the strong growth in arrivals from other countries.

We revise our 2017 GDP growth forecast up to 4.7% from 4.3%, as we expect the government’s budgetary focus on infrastructure spending and corporate tax reform to boost investments.

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Georgian Economy - Steaming Ahead

20 Apr, 2017

Georgia’s flexible exchange rate and economic diversification once again braced the economy against external headwinds in 2016. Growth remained stable at 2.7% while price pressures have been contained with year-end inflation at 1.8% y/y. With the better external environment, economic activity rebounded strongly in 2017 with GDP growth of 4.8% y/y in 2M17. The GEL’s appreciation since mid-February and Georgian citizens’ recently granted visa-free travel to the EU are boosting consumer and business confidence. The government’s four-pillar reform program and related increase in infrastructure spending, alongside new tax exemptions for the corporate sector, are expected to boost investment growth. The better external environment due to firming world commodity prices and the moderate recovery in partner countries’ economies are expected to have a positive impact on goods exports and remittances throughout 2017. Moreover, significant growth in tourism revenues is anticipated with Georgia being a cheap and popular tourist destination, as well as solid FDI of US$ 1.7bn. These factors are boosting the country’s growth outlook, with the economy expected to grow by 4.3% in 2017.

Most resilient economy in the region in 2016. The Georgian economy remained resilient despite the external headwinds hampering performance since end-2014. Growth remained stable at 2.7% y/y in 2016, which we view as fairly solid compared to the country’s major trading partners. The construction sector grew by 8.1% in 2016 as a whole despite the slowdown in 2H16, attributed to the high base in 2015. Importantly, the two largest sectors of the economy posted growth – manufacturing (+4.8% y/y) and trade (+1.8% y/y) – reflecting the recovery in both external and domestic demand, supported by firming world commodity prices and increased remittances in 2H16. Robust tourist arrivals drove the strong 9.9% y/y growth in the hospitality sector. Financial intermediation rose 9.3% y/y. Real estate operations was the other fastest-growing sector at 6.7% y/y despite uncertainties related to GEL depreciation. Transport (-0.7% y/y) and communications (-0.2%) were the only sectors to post a modest contraction in 2016. Growth in agriculture was flat despite various government-supported programs in the sector. 

Investments drove growth in 2016; recovering private demand also supported growth in 2H16. Investments increased by 7.9% y/y in real terms in 2016 as FDI related to strategic projects and residential construction increased private investments by 10.5% y/y. Government investments fell 4.2% y/y in real terms, as infrastructure spending slowed significantly in 4Q16. Private consumption recovered in 2H16, bringing the 2016 growth figure to +1.2% y/y. This was supported by growth in remittances since June 2016 and an 18.5% y/y expansion (excluding FX effect) in the retail credit supply. Strong growth in services exports largely compensated drop in goods exports. At the same time, imports recovered in the 4Q. As a result, net exports contribution to GDP was negative 0.9ppts compared to negative 3.7ppts in 2015.

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