EXECUTIVE SUMMARY

Georgian politics are never far away from heated controversy and, true to form, the country ended 2020 with a parliament boycotted by the opposition—with the parties defeated in the late autumn election decrying the poll as rigged in favour of ruling party Georgian Dream—and started 2021 with a declaration from the kingpin of the country’s politics and government in the past decade, billionaire oligarch Bidzina Ivanishvili, that he was quitting the political scene (“We shall see…”, said sceptics noting he has exited once before, before returning to redouble Georgian Dream efforts).  

Georgia is dealing with major macroeconomic stability issues prompted by the collapse of its tourism industry, a key element in the country’s balance of payments as well as an important contributor to GDP.

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.

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.

The government plans to relaunch the Anaklia deep sea port project on the Black Sea coast in 2021, having terminated its contract with Anaklia Development Consortium (ADC). The situation at the Caucasus Online telecoms operator (which owns the optical fibre cable under the Black Sea) is also likely to see significant developments. A regulatory body took over the company’s management after the Georgian owners sold a 49% stake to Azerbaijan’s NEQSOL, which in turn asked for international arbitration.

POLITICS

Two old foes who have been the giants of Georgia's politics in the past two decades, namely Mikhael Saakashvili (l) and Bidzina Ivanishvili (r), seen here in 2012, the year before Saakashvili fled Georgia, may have finally departed the country's political scene. Image credit: VoA, Georgian service..

Just as this Outlook was being finalised, Bidzina Ivanishvili, billionaire founder and chairman of Georgia’s ruling party Georgian Dream and the dominant politician in the country for the past decade, announced his retirement from politics.

"I deem my mission to have been accomplished. I have decided to completely withdraw from politics and let go of the reins of power. I am leaving my position as party chairman, as well as the party itself," Ivanishvili, who will turn 65 years-old in a few weeks’ time, said.

Ivanishvili has quit once before, several years back, before returning to renew his part in Georgia’s always heated political battle, so many sceptics will expect him to return to politics once again. In his farewell letter, he also stated: "It is heartbreaking that a constructive opposition has not been created." That was a reference to how, although Georgian Dream won only two-thirds of parliament’s seats in last autumn’s general election, the “other third” have not turned up for debate. The opposition parties have refused to take their seats in the legislature, remaining united in accusing Ivanishvili’s party of having rigged the vote.

Also seemingly bowing out of Georgian politics, at least on a de facto basis, is ex-president Mikhael Saakashvili, who, with his United National Movement (UNM), failed time and time again to knock Ivanishvili off his perch. His role in the general election proved divisive among some of the opposition. Saakashvili’s credibility and support among voters has also faded although the UNM remains the leading opposition party in Georgia.

Irakli Kobakhidze, who currently serves as executive secretary of Georgian Dream, is expected to replace Ivanishvili as party chairman.

He must contend with opposition parties continuing to keep up impressive unity in boycotting parliament with the aim of forcing an early election. Georgian Dream’s MPs, meanwhile, are, unopposed, already passing substantial bills, including the 2021 budget plan.

Given the precarious state of the economy undermined by the coronavirus pandemic, any big political anxieties that might generate pressure leading, for instance, to more local currency depreciation is rather unwelcome.

MACRO

The massive disruption caused to Georgia’s tourism industry by the pandemic has exposed Georgia to major balance of payments issues: the current account deficit doubled to more than 10% of GDP in 2020. The BoP issues have passed through to the exchange rate and the local currency, the Georgian lari (GEL), in 2020 lost 13%. The central bank, (the National Bank of Georgia, or NBG) has been substituting, by direct interventions, the lost billions of euros worth of tourism revenues with the government’s borrowed money or money received as grants from international finance institutions.

At the same time, subdued economic activity (the World Bank calculates Georgia’s GDP contracted by around 6% in 2020) and one-off public expenditures on social and health purposes exerted pressure on the public budget in 2020, which soared fivefold to over 8% of GDP in the year. The pressure was also felt in public debt. It neared 60% of GDP.

The central bank has been providing foreign exchange by using a significant buffer built up by the government with the help of a multitude of international financial institutions (IFIs). But at the end of the day, the government (and the central bank, depending on its success in preventing depreciation) will pay the bill—and the country must restore robust growth in order to dilute the debt-to-GDP ratios and pay back the part of the financial package not extended as grants. The IMF trusts Georgia can bring the public debt to GDP ratio down to 52% in 2025, from 58.8% in 2020-2021.

Under these circumstances, the very notion of an equilibrium in the exchange rate has lost substance and the central bank is navigating uncharted territory, relying on persuasion and rhetoric (in addition to hawkish interest rates) to achieve price stability and prevent negative expectations from becoming self-fulfilling. The post-crisis exchange rate should show a weaker GEL simply because tourism is not likely to resume at the same pace as before. With this in mind, the central bank is tolerating to some extent the lari’s nominal and real depreciation.

REAL SECTOR

The Georgian economy looked on course to shrink by 5% in 2020 while its likely growth in 2021 would be quite robust with 5% in the other direction, allowing for almost a complete recovery, according to the World Economic Outlook (WEO) from the International Monetary Fund (IMF). After the seventh review under the IMF Extended Financial Facility in December, the Fund revised its 2020 GDP contraction forecast to 5.1% and toned down expectations for 2021 growth to 4.3%. The World Bank, for comparison, in the January edition of its Global Economic Prospects envisages a 6% GDP contraction for Georgia in 2020 and expects a 4% recovery in 2021.

The key driver behind the GDP projection remains the recovery in tourism. Galt & Taggart in a report dated December 23 expected Georgia’s economy to rebound to 5.0-5.5% growth in 2021 assuming tourism recovers to 50% of its 2019 level; without a recovery in tourism, it expects growth at around 3.7% in 2021.
 

PUBLIC SECTOR

Georgia’s public debt metrics deteriorated more than envisaged during the 2020. Due to the economic decline in 2020-2021, tax revenues collapsed and the budget deficit increased to 9.1% of GDP in 2020 (from 1.8% of GDP in 2019), and it is not going to decrease to anywhere below 7.6% in 2021 according to Minister of Finance Ivane Machavariani.


The government debt, which also increased along with the expanded budget deficit, is set to go beyond the 60% margin in 2021. In this context, it is relevant to mention that the government is planning to roll over its $500mn eurobond in 2021, to preserve international reserves. Repaying the eurobond from government deposits rather than refinancing it would reduce the 2021 debt ratio by 2.8pp of GDP.

According to the 2021 budget planning, budgetary revenues this year are set at GEL16.76bn ($5.1bn), up by GEL2.2bn compared to 2020. The state budget estimates tax revenues at GEL10.34bn. The document calculates revenues from foreign grants at GEL287mn; other revenues are expected at GEL550mn. GEL5.28bn is set to be allocated through external debt. Revenues from privatisation are set at GEL150mn.

The government drew up the budget planning with the assumption of 4.3% economic growth in 2021. It projects 5.5% in average economic growth in 2022-2024.

Budgetary expenditures are set at GEL18.38bn, up by GEL4.06bn compared to 2020. Under the 2020-2021 anti-crisis plan, GEL2.8bn ($850mn) will be allocated to support businesses and GEL200mn ($61mn) to assist citizens.

FINANCIAL SECTOR

The banking sector may end 2020 at close to zero profitability, or with a small profit, according to estimates of Vakhtang Butskhrikidze, CEO of the country’s biggest lender by assets TBC Bank. According to the central bank, the banks posted a small GEL1.5mn operating loss in the first 11 months of 2020.

The main determinant of losses in the financial sector in 2020 was the accumulation of provisions for the potential deterioration of loan portfolios, at the request of the GNB. In total, Georgian commercial banks have set aside GEL1.22bn ($370mn, 2.4% of banking sector assets and 3.8% of the volume of net loans as of March 2020) in the buffer, which reflects the amount of possible loan losses due to the expected crisis. The central bank also decided in the spring to radically reduced the capital requirement.

"The banking sector depends on the economy itself, so the expectation is that the economy will grow by 4% or just over 4%. Therefore, I think that 2021 will be better for the financial sector compared to this year, but the sector as a whole will probably return to its old indicators in 2022," said Vakhtang Butskhrikidze.

The National Bank of Georgia has appropriately maintained a moderately tight monetary

stance to anchor inflation expectations, while safeguarding exchange rate flexibility, the IMF concluded in its December EFF revision. The tight monetary policy stance and continued foreign exchange intervention may need to be sustained to prevent disorderly market conditions and bring inflation towards the 3% target.

The central bank on December 9 decided to keep its key refinancing rate unchanged at 8.0%.

“According to the current estimates, a tight monetary policy may be necessary for longer, subject to inflation expectations and the dynamics of economic activity. Depending on the economic developments, the [monetary policy] Committee does not rule out the need for an increase in the interest rate in the future,” a press release read.