SP Advisors updates Georgia's economic outlook for 2015, stresses need for reform

By bne IntelliNews October 22, 2015

Georgia's GDP growth could reach 2.7% in 2015, according to consultancy SP Advisors, which upgraded its forecast for the country' economy on October 21 from previous forecasts of 2.1%, thanks to somewhat better-than-expected results in January-August.

In its macroeconomic review, the consultancy notes that "the Georgian economy has digested the external shocks stemming from recessions in Ukraine and Russia at an entirely reasonable cost with a 22% year-to-date currency depreciation. In the coming months, the weaker currency will enable keeping the country’s current account gap under control. On the downside, the y/y GDP growth of 2.8% in January-August was well below the economy’s potential and we steadfastly believe a new wave of structural reforms is badly needed to reinvigorate growth. The weaker lari should also pump up exports and the economy overall, although the effects will not be significant and will be stretched over some period, in our view."

While Georgia's economic growth this year remains unimpressive, all but one demand-side GDP components have been growing at low single-digit rates, SP Advisors notes. The real drag on the economy is the steep decline in exports, which dropped by 24% y/y to $1.6bn in January-September, according to the National Statistics Office of Georgia (Geostat). 

"We do see the lari’s year-to-date depreciation supporting exports, but it will take time before producers regain their foreign market niches. Private consumption will continue to be restricted by a material decline in migrant remittances, which in the past have fueled a large portion of new demand," the report continues. Remittances are approximately equivalent to 10% of Georgia's GDP, but have fallen steeply in recent months, by as much as 35.1% y/y in August, on the back of the economic crisis in the main source markets Russia and Greece.

Meanwhile, SP Advisors anticipates an even higher inflation rate, which could reach 6-6.5% by year-end, after accelerating to 5.4% in August. The Georgian national currency has depreciated by 37% in the last year and by 22% since January, driving inflation up. "On the other hand, prices are unlikely to deviate materially from the National Bank of Georgia’s (NBG) 5% inflation target in the foreseeable future. Any downside risks (acceleration) would be mitigated by sluggish domestic consumption," SP Advisors adds.

A brighter future for foreign trade in 2016

Despite coming under fire from the ruling Georgian Dream coalition over the depreciation of the national currency and coming close to being stripped of its supervisory role over the banking sector, Georgia's central bank was wise in allowing the exchange rate to absorb the shock of the regional economic downturn, SP Advisors believes.

Unlike its Kazakh and Azerbaijani counterparts, which spent large amounts of foreign reserves to unsuccessfully prop up currencies, the NBG held on to its reserves, which remain healthy at $2.4bn according to SP Advisors, despite a 9% y/y decrease. In comparison, neighbour Azerbaijan lost 50% or $7bn worth of its regulator's reserves in the past year.

"We expect the NBG to maintain the current level of reserves through end-2016, which will offer a healthy buffer against external shocks. Major pressures on the foreign exchange rate are unlikely to emerge in the near-term, and we believe the currency will remain fairly stable in the near future," the consultancy anticipates. 

On a more positive note, the weaker lari should prevent the external imbalances from exacerbating in the rest of 2015 and 2016. Georgia reported a $4bn current account deficit in January-September, which is a perpetual problem for Tbilisi, and forces the country to look for external funding to cover it. However, both foreign direct investment (FDI) and debt inflows are sufficient to ensure that a major currency crisis does not take place, and the country should have no problems raising funding in the foreseeable future, the consultancy concludes.

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