Apr 4, 2019

Monthly Update: March 2019

Monthly Update

  • Fed and ECB both turned more dovish. Still, stronger euro is considered as a baseline scenario in medium term. If EUR strengthens against USD, GEL is expected to follow but not by 100%. Also, Weaker USD against EUR and other major currencies is usually associated with higher growth in many emerging and developing economies, including emerging and developing Europe and CIS. Growth of inflows to Georgia was solid in February despite the continued decline from Turkey.
  • Real GDP growth accelerated to 4.6% YoY in February 2019 following the 3.5% YoY increase in January. Higher economic activity mainly reflects strong exports of goods, especially in categories with higher domestic value added. Wider fiscal deficit coupled with some pick up in remittance and also stable tourism inflows were also supportive. However, imports remained weak with lower retail lending and somewhat worsened consumer sentiments.
  • Budget posted a deficit of 186 mln in February 2019 – an estimated 6% of monthly GDP. A sharp increase in spending was driven by higher current as well as capital spending both up by 17.8% YoY.
  • Gross exports of goods in USD terms rose by 19.1% YoY (+29.7% YoY in EUR) in February – a significant acceleration compared to 7.2% growth in the previous month. Imports of goods went up by moderate 0.6% (+9.6% YoY in EUR) in February. Stricter retail lending regulations have affected the growth of consumer imports negatively, especially in the durables segment. The trade in goods balance continued to improve for the 4th consecutive month in February.
  • The number of tourists went up by 5.1% YoY in February. A slow growth reflects declining number of visitors from Turkey, Iran and Armenia. Arrivals continues to be strong from the EU with 29.0% YoY increase. The number of incoming trips by plane remained solid expanding at 24.7% YoY.
  • The remittance growth picked up to 10.2% YoY in USD terms (+20.1% YoY in EUR) in February, mainly reflecting the increase from the EU, the USA and Israel.
  • FDI inflows declined by 34.9% YoY in 2018 to 7.9% of GDP – normalized level following the above trend inflows over 2014–17. The reduction mostly reflected the finalization of the BP’s SCPX project and change of ownership of non-resident companies to residents as well as repayment of some FDI related debt.
  • The CA deficit to GDP ratio improved by 1.1PP in 2018 and stood at 7.7%. At the same time, when adjusted for reinvested earnings the deficit was almost unchanged at 6.0%. FDI inflows covered most of the deficit with also a significant share of debt financing. Also, the NBG refilled its reserves indicating that the financial account inflows exceeded the CA deficit financing needs.
  • The total bank loan portfolio increased by 15.7% YoY in February 2019 compared to 17.2% growth in the previous month, excluding FX effect. The retail regulations introduced in January continues to negatively affect the retail credit growth also in February. GEL liquidity is favorable mostly owing to the acceleration of fiscal spending and NBG’s FX interventions creating the space for further GEL lending and/or reducing the interest rates on GEL deposits.
  • The NBG delivered another 0.25 PP rate cut on its 13th of March meeting. A looser policy stance have been reflected in treasury securities and interbank markets. However, the impact on GEL deposits is not yet evident.
  • Annual inflation increased from 2.3% in February to 3.7% in March mostly driven by a higher excise tax on tobacco, increased prices on travel and low base effect.
  • On the back of higher inflows, lower oil prices and possibly weak domestic demand, NBG bought 103 mln USD in February— an estimated 10% of the same month GDP. In March the NBG has not intervened on FX market via FX auctions. As for GEL call options, the information on amount exercised will be released by the end of April. A substantial fiscal spending as well as stronger lending in GEL compared to FX in February and possibly in March together with somewhat higher oil prices could have eased the appreciation pressures on FX market in March.
  • Despite the appreciation pressures, GEL REER remained almost flat in February and somewhat weakened in March remaining below its medium term average.
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