Georgia, the small South Caucasus country of 3.9mn, expanded by 4.8% y/y in Q4 from Q3’s 3.7% y/y, meaning the country expanded by 4.8% y/y in 2018 overall. That compares to 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 growth of 4.5%. Central bank governor Koba Gvenetadze told Reuters last month that he expected the economy to grow by at least 5% in 2019.
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 trade gap widened by 10% y/y despite exports rising at a robust rate, above that of imports. Exports rose by 22.9% y/y to $3.36bn while imports advanced by 14.9% y/y to $9.12bn in the year. The negative trade balance was $5.76bn in 2018. Reducing the foreign trade and overall current account deficit has been an ongoing concern in Tbilisi. An oil and gas-importing country, Georgia has struggled to expand its manufacturing base enough to make up for its sizeable energy imports and for its imports of higher added-value goods.
The country saw its current account deficit falling further this year. Georgia posted its first ever current account surplus of $5.7mn in the third quarter of 2018, swinging from the $135.2mn deficit it recorded in the same period of 2017.
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 is presently under investigation for “facts of the legalization of illicit income”, according to the Prosecutor’s Office of Georgia. TBC rejected the allegations. Resigned chairman and co-founder of TBC Bank, Mamuka Khazaradze, on February 26 was reported as saying that he and his deputy Badri Japaridze were forced to step down following pressure from the Georgian government amid investigations related to operations carried out by the lender in 2007-2008, which allegedly involved conflicts of interest.
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