Georgian economy buffeted by waves from Russia and Ukraine

By bne IntelliNews February 19, 2015

Monica Ellena in Tbilisi -


The pressure is growing on Georgia’s economy as the economic crisis in Russia and Ukraine deepens, hitting exports, remittances, and foreign investment, and pushing down the value of the lari against the dollar.

On February 11 the National Bank of Georgia (NBG) raised its benchmark interest rate to 4.5% and sold $40mn at a foreign currency auction as part of a strategy to preserve financial stability, control inflation, and support the lari. The central bank has managed to keep the refinancing rate stable at 4% since February 2014, when it was lifted from 3.75%.

The move, which governor Ghiorghi Kadagidze had hinted at beforehand, was aimed at taming inflation risks resulting from recent lari weakness. The NBG’s primary monetary policy objective remains inflation targeting and it intervenes to sustain the lari only in case depreciation starts affecting prices. In January consumer prices rose 1.4% y/y after increasing by an annual rate of 2% in December.

However, analysts consider that higher inflation does not explain the hike. In a research note released after the NBG announcement, Renaissance Capital’s analysts stated that “we believe that the rate hike was mainly implemented to provide support for the lari itself”.

Georgia marked both the beginning and the end of 2014 with a sharp weakening of its currency against the dollar. The currency remained broadly stable throughout 2013 and 2014, while other currencies significantly lost value against the dollar, but the lari’s winter blues led to ripples of worry. After re-gaining value at the end of the year, the lari started depreciating again in early January and lost 7% against the dollar, falling to GEL2.03 per dollar on January 29. Following the auction, the lari was trading at 2.0248 per dollar, stronger compared to the 2.0421 on February 10, but altogether, between October and February, the lari exchange rate had weakened by 14% versus the dollar.

RenCap nails it down to three main reasons: “Lower remittances coming from Russia, smaller Georgian exports to Russia and some other important markets; general volatility on the global financial markets; and fears regarding the intensified Russian collaboration with Abkhazia and soft domestic political turbulence, which has likely limited to some extent FDI inflows.”

“The recent decision fits well inflation targeting standards,” reads the note “though highlights the authorities’ concerns regarding recent lari weakness. We would still expect the lari exchange rate to weaken by 9% by the end of 2015, to GEL2.2/$1 vs GEL2.0/$1. However, we note that such lari depreciation will not look as significant relative to euro, rouble and other emerging market currency dynamics.”

The latest figures on remittances and exports depict a glim picture. In January, individual money transfers from abroad amounted to $75.5mn, down by 23.3% y/y. Georgia's foreign trade turnover   stood  at $694mn, down by 9% year on year, with exports diving by 30% y/y to $156mn.

But external factors, including regional political instability, are not the only ones threatening Georgia’s economy.

“The last two years the government has approved a string of business-unfriendly bills, from the labor code, to the visa restriction, from the ban on purchasing land for foreigners to an increased pressure from the revenue office,” Fady Asly, chairman of the International Chamber of Commerce of Georgia told bne Intellinews “The country is losing its competitive edge which is a luxury it cannot afford as it is a small country and a small market.”

He is not a lone pessimist. Eric Livny, executive director of the International School of Economics, argues that hasty attempts to tick off boxes, namely to “harmonise” Georgia’s legislative and regulatory environment with the EU, are “undermining Georgia’s reputation as a great place to do business”, as they are making the business environment unstable and unpredictable.

Last year Georgia’s economy grew by 4.7%, short of the government’s 5% forecast. For 2015 Georgian Finance Minister Nodar Khaduri set the country's economic growth again at 5%, although on January 30 the NBG’s governor said that the government should consider a downward revision of its forecast.

“In my mind, it will be a miracle if we hit 3%,” says Lebanon-born Asly, a long-time investor in Georgia. “There is no ground for optimism, figures talk, and I think that in the short term the picture is bleak.”

Last November the International Monetary Fund (IMF) set Georgia’s growth at 5%, although the forecast was “subject to risks, mainly on the downside”. On February 16, the IMF’s representative said that in the coming weeks the institution will cut its prediction “to a more realistic figure”.

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