Georgia, the small South Caucasus country of 3.9mn, expanded by 4.7% y/y in Q1 2019 after strengthening to 6.0% y/y in March alone, preliminary estimates from the country’s statistical office show. That compares to 2018’s 4.8% y/y overall and 2017’s 5% advance and is not far from Georgia’s performance over the medium term, which has remained robust in recent years.This year the government expects the country, increasingly a popular tourist destination, to see the economy to grow by at least 5%.
Among the reasons behind the expansion in growth are improved domestic and external demand due to significant foreign capital inflows - mainly from exports, tourism and remittances - and improved business sentiment, credit growth and capital spending by the government. However, structural imbalances continue to plague Georgia's macroeconomy, most notably its large trade deficit, which is financed partly with external borrowing, and its unpredictable currency, the exchange rate of which has varied widely.
Georgia’s wide trade gap has gradually shrank since last October. In March 2019 it stood at only $419mn, 25% smaller compared to the same month of last year. The trade gap in the rolling 12 months ending March increased by only 2.4% y/y to $5.56bn. The contraction was a result of imports stabilising and even easing over the past several months, while exports kept growing at robust rates.
The country saw its current account (CA) deficit falling further in 2018, narrowing by 15.2% y/y to $458.1mn in the fourth quarter, the central bank in Tbilisi has announced. The full-year 2018 CA deficit contracted by 6.4% y/y to $1.24bn. The CA deficit to GDP ratio decreased from 8.8% in 2017 to 7.7% in 2018, the latest data showed. The balance of goods remained the major contributor to the trade gap in Q4.
The gross external debt of Georgia amounted to $17.8bn as of 31th of December 2018. It accounted for 109.6% of GDP.
Meanwhile, Georgia’s central bank expecting strong economic growth and a pick-up in consumer demand this year, plans to gradually ease interest rates towards 5-6% from the current refinancing rate of 7% over the next two years. Headline inflation is predicted to hover around 3% per annum during 2019-2021, the central bank added. Georgian current account dynamics and Georgian lari exchange rate is not expected to fluctuate much and the central bank would continue to purchase foreign currency on the market this year.
The national lender purchased $197.5mn on the market in 2018 and has not sold dollars since the start of 2017, increasing the level of its international reserves to $3.29bn by the end of December from $3.04bn a year ago.
Georgia’s banking sector achieved high profitability in 2018, while, Georgia’s London-listed TBC Bank has been under investigation for “facts of the legalization of illicit income”, according to the Prosecutor’s Office of Georgia. TBC rejected the allegations. Meanwhile, Georgia’s Finance Minister advocates for softer lending regulations.
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