Georgia, the small South Caucasus country of 3.9mn, expanded by 5.1% y/y in April compared to the 4.7% average seen in Q1 2019, 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. The central bank in Tbilisi has said it expects 5% growth across the whole year, while the World Bank has revised downward its outlook for Georgia’s GDP growth in 2019 and 2020 by 0.4pp to 4.6% and 0.2pp to 4.8%, respectively.
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’s current account (CA) deficit amounted to $227mn in the first quarter of 2019, 48% down y/y. Georgia’s CA deficit narrowed in 2018 compared to 2017, but remains at a still high level of 7.7% of GDP ($1.24bn) and its dynamics depends to a large extent on the revenues generated by tourism. The gross external debt of Georgia amounted to $17.8bn as of end-December 2018. It accounted for 109.6% of GDP.
Meanwhile, Georgia’s consumer price index (CPI) accelerated to 4.7% y/y in May from 4.1% y/y in April and 3.7% y/y in March, a significant deviation from the 3% target anticipated by the central bank. Inflation will remain above the 3% target throughout the year and ease no sooner than 2020, the central bankers said at their May monetary board meeting. The benchmark interest rate was held at 6.5% on May 1, citing forecasts that suggested annual inflation to hover around 3% target this year.
The local currency’s weakening, albeit moderate (1.5% versus the euro in May compared to April) is likely to add more inflationary pressures while, on the upside, support the narrowing of Georgia’s wide trade deficit.
On the political front, with 91 votes in favour and zero against, the Parliament of Georgia lifted the immunity of MP Nika Melia of the opposition United National Movement (UNM) at its June 26 plenary session. Prosecutors hold him responsible for inciting the protesters on the night of June 20-21 when attempts were made to storm the parliament, resulting in police use of rubber bullets, tear gas and water cannon and numerous serious injuries among demonstrators. The protests were sparked after a Russian MP was invited to address Orthodox lawmakers from across the region from the speaker’s chair in the chamber.
President Recep Tayyip Erdogan did it again. On September 23, Turkey shocked with a 100bp rate cut. More cuts are awaited despite booming (even official) inflation and global inflationary period.
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