Georgia Country Report Nov19 - November, 2019

November 5, 2019

Georgia’s economic growth accelerated to 5.7% in the third quarter of 2019, up from 4.5% y/y in Q2 and 4.7% y/y in Q1, according to preliminary data released by statistics office Geostat on October 31. However, a deceleration is visible within the quarter, with growth falling from 6.1% y/y in July to 5.8% in August to 5.2% y/y in September. In principle that might be attributed to the sanctions imposed by Russia on Tbilisi following anti-Kremlin demonstrations by Georgians. They translated into in a smaller number of tourist arrivals.

Average growth for the first three quarters of the year was 5.0%, compared to 4.8% in the same period of 2018. The government’s fiscal policy is run according to envisaged 2019 growth of 4.5%. That’s broadly in line with the expectations of the international financial institutions (IFIs). The Q3 GDP figures, however, allow for hopes that a better performance will be recorded.

The IFIs have cut their projections for Georgia’s economy after taking into consideration two major drivers: the Russian sanctions (a ban on flights has put pressure on tourism and industries on the same horizontal) and monetary policy tightening pursued by the central bank to curb inflation partly generated by expectations for a weakening of the Georgian lari. The former factor might be removed sooner than expected, however, while the latter depends to a large extent on rhetoric and expectations.

On the upside, gradual currency weakening since last year has already resulted in a better external balance. Georgia’s trade deficit narrowed by 7.4% y/y to €1.33bn in the third quarter, with the external balance improving for the fourth consecutive quarter. But the lagged effects of the monetary tightening will be seen later next year.

A third major driver for Georgia’s economy is the volatile regional economic context. The World Bank has cut its forecast for the advance of the Georgian economy in 2019, lowering its growth prediction by 0.2pp to 4.4% for this year and deciding on a deeper 0.5pp cut in its medium-term 2020-2021 outlook, according to its autumn Europe and Central Asia Economic Update, released on October 9. The sanctions from Russia will reduce GDP by 0.6%, it estimated.

The Asian Development Bank (ADB) on September 25 cut its 2019 growth outlook for Georgia to 4.7% from 5.0%. Also, in its Asian Development Outlook 2019 Update, the ADB changed its anticipated 2020 GDP expansion for the South Caucasus country from 4.9% to 4.6%.

Georgia’s consumer price index (CPI) accelerated to 6.4% y/y in September from 4.9% in the month before as food prices keep rising fast. Consumer prices likely came under pressure because the local currency weakened further prompting a central bank intervention to keep the lari above the psychologically important threshold of GEL 3 to the dollar.

Georgia’s central bank on October 23 raised its key refinancing rate by 1pp to 8.5%, thus continuing its efforts to curb inflation partly fuelled by expectations for imminent currency depreciation. The central bank hiked its key interest rate twice in September by 50bp each time. The Georgian lari has remained undervalued.

On the banking front, in the first half of 2019, profits dropped for seven out of 15 commercial banks registered in Georgia and the aggregate net profit of the banking system decreased by 10% y/y to GEL361mn ($124mn), according to a report of the National Bank of Georgia. Some 96% of the profits was realised by the two largest banks: TBC Bank and Bank of Georgia.

Meanwhile, Georgia’s government extends deadline for Anaklia Development Consortium (ADC) to raise financing for Anaklia deep sea port, one of the country’s major economic projects, which has in recent months become subject to a fierce political dispute. The government has decided not to terminate the public-private partnership contract signed in 2016, but to give ADC two and a half months more to meet requirements, Minister of Regional Development and Infrastructure Maia Tskitishvili said on October 15. Those requirements are to find a replacement for US-based Conti Group that lately pulled out of the project and secure $400mn financing for the first stage of the project.

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