Georgia Country Report Aug19 - August, 2019

August 2, 2019

Georgia, the small South Caucasus country of 3.9mn, expanded by 4.9% y/y in the second quarter of the year, matching the expansion seen in the first quarter, 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.

Growth was broadly expected to slow, partly as a result of reprisal measures imposed by Russia that were likely to hit tourism and the exports of wines and fruit. Against the backdrop of increased external risks, the National Bank of Georgia (NBG) is forecasting real GDP growth of 4.5% this year (versus its 5.0% prior forecast), according to a monetary policy report released by the central bank. The revision of the central bank's forecast was prompted by the introduction of restrictions on air travel to Georgia by the Russian Federation.

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 contraction was a result of imports stabilising and even easing over the past several months, while exports kept growing at robust rates. Georgia’s exports reported a sharp increase of 11.5% y/y to just under $1.8bn in the first half of 2019, while imports continued to far outstrip exports at $4.2bn despite falling by 4.9% y/y.

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.

Georgia’s consumer price index (CPI) eased to 4.3% y/y in June from 4.7% y/y in the month before as food prices moderate. 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 a hawkish 6.5% on July 24, 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.

Meanwhile, Georgian prosecutors on July 24 charged TBC Bank founders Mamuka Khazarade and Badri Japaridze, chairman and deputy chairman of TBC Bank Group, with laundering $16.75mn in 2007-2008. They both resigned from its board with immediate effect. TBC Bank Group’s shares plunged nearly 12% on the day of the news.

On the political front, ex-Georgian defence minister Irakli Okruashvili was arrested on July 25 over anti-government protests seen in Tbilisi on the night of June 20-21 when protesters attempted to storm the parliament but where beaten back by riot police. Okruashvili, presently engaged in a legal battle over the ownership of the country’s main TV station Rustavi 2, has alleged his arrest is part of an attempt by the billionaire head of Georgia’s ruling party Georgian Dream, Bidzina Ivanishvili, to control independent media ahead of what are expected to be tight parliamentary elections next year.

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