Georgia Country Report May21 - May, 2021

May 5, 2021

Summary:

Georgia’s first-quarter GDP contracted by 4.2% y/y, according to the rapid estimate published by statistics office Geostat. The figure marks a clear improvement from the 6.8% decline seen in Q4. However, it was partly the result of base effects seen one year after the economic difficulties caused by the coronavirus crisis began. The first positive quarterly GDP data on an annual comparison is expected for Q2, one year after the 13.2% plunge seen in the second quarter of 2020. But as tourism is still far from returning to normal in Georgia, it is only going to be a partial economic recovery, however strong it may seem in annual terms.

GDP is estimated to have risen by 4% y/y in March, a big improvement from the 11.5% y/y contraction seen in January. In February, the GDP was down 5.1% y/y, according to Geostat's rapid estimate.

The latest forecast for the country’s GDP dynamics in 2021, issued by the Asian Development Bank (ADB), envisages 3.5% of growth; it would not fully offset the 6.2% contraction of last year. The International Monetary Fund (IMF) expects only a 3.5% expansion this year to follow the steep 6.1% contraction recorded in 2020, according to its latest World Economic Outlook (WEO) report released on April 6.

The IMF said it expected that Georgia’s current account deficit would slightly moderate to 11.5% of GDP this year from 12.3% in 2020, but this figure would still be double the pre-crisis level.

Inflation in Georgia was set to moderate to 3.8% this year, down from 5.8% in 2020, the IMF anticipated. The country was singled out as among those with the steepest rise in food prices (+3.0%) at the end of 2020, with the consequent negative impact on food security.

Georgia’s coordinating council set up to prevent the spread of the coronavirus at its February 24 meeting decided to lift a number of pandemic restrictions from March 1. In the meantime, efforts to secure a supply of coronavirus vaccines for the South Caucasus country are advancing slowly.

The first wave of the coronavirus health crisis was almost entirely avoided by Georgia with well coordinated measures in the spring of 2020, though at the expense of economic growth. However, the pandemic exploded in November-December in Georgia, straining the economy further. On the upside, the country has received sufficient financing ($1.5bn, equivalent to 9% of GDP) from donors to keep the exchange rate in check and address expected inflationary challenges.

The National Bank of Georgia (NBG) sold €30mn at a foreign exchange auction on April 22 at a weighted average exchange rate of GEL 3.4447 per USD. The official exchange rate for April 23 was 3.4462 GEL to the USD, 5.2% higher in the year-to-date.
In 2021 so far, the NBG has conducted seven currency auctions to reduce GEL exchange rate fluctuations, selling $242.9mn in all.

The NBG, citing a rather bleak inflationary outlook generated by overlapping domestic and external factors, on April 28 hiked its refinancing rate by another 1pp, following the 0.5pp added in March, resulting in a hawkish 9.5% rate that is the highest seen for several years. NBG, in explaining its monetary policy tightening, is citing risks of imported inflation and high dollarisation that facilitates the strong pass-through of exchange rate variations to consumer prices.

The foreign direct investment (FDI) flow to Georgia amounted to $616.9mn in 2020, down 52.9% from 2019, according to the preliminary data announced by statistics office Geostat. The figure was the lowest recorded in 15 years.

Georgia's exports decreased by 6.8% y/y in January-February to $494.7mn. However, domestic exports (which exclude re-exported goods) increased by 7.9% y/y to $369.0mn. They amounted to 74.6% of total exports, driven by exports of metal ores to China. Direct exports have now been on the rise for four years, moving up 50% since 2016.

On the political front, the ruling party Georgian Dream on April 16 signed up to a compromise prepared by European Council President Charles Michel’s personal envoy Christian Danielsson. The agreement is entitled “A way ahead for Georgia.”

A quick resumption of the global tourism industry and the normalisation of relations between the ruling and opposition parties are the main elements that would in coming years address the damage inflicted on Georgia’s economy.

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