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May 20, 2019
TBC Economic Review: Top 10 Insights
TBC Economic Review
- Despite the higher USD cost from 2014, Georgia’s cost of debt has not increased due to a strong improvement of the country’s risk perception that has been also reflected in better credit ratings.
- External inflows play a key role in growth and have proved resilient, thanks to being well diversified with an increasing share taken by new, more stable markets. In 2019, inflows are expected to slow somewhat, but will remain reasonably strong.
- The strong USD cycle is likely nearing its end, which will have a positive impact on emerging markets. When taking FX risk with a GEL income stream, EUR/USD diversification appears to be the optimal choice; however, retaining somewhat higher share of EUR is probably desirable, especially for the business sector being more sensitive to economic cycles rather than most of households.
- The CA deficit adjusted for reinvested earnings and FDI-related imports stood below 6% of GDP in 2018. Georgia’s CA deficit can be reflecting the opportunities, rather than the weaknesses.
- Georgia remains fiscally prudent with very low costs of debt and an increasing share of capital spending. Following its contractionary impact, under the baseline scenario the budget deficit is expected to strongly support growth in 2019.
- Strong fiscal spending in 2019 will compensate for the negative impact on household consumption that has arisen from declining non-mortgage lending. This will have a relatively stronger positive impact on domestic value added goods, but a negative one on durable goods that are primarily imported. Overall, household consumption does not appear to be excessive when compared to its trend and that of other countries.
- 2018 was a peak year for business lending thanks to the recovery of growth since 2017. As expected, this was more reflected in corporate sector being more cyclical compared with MSME. Going forward, business credit growth should return to its trend.
- Overall credit growth is going to slow as a result of tighter retail regulations and the normalization of business lending. If credit growth slows more than in the rational scenario, there are ways to stimulate lending without excessive risk taking.
- The GEL is expected to appreciate and be much less volatile, supporting price stability and deposit larization.
- GDP growth is expected to be strong in 2019. While credit regulations pose a downside risk, fiscal deficit is a very strong upside coupled with reasonably strong inflows that are likely to be higher from the second half of the year, in line with the IMF’s outlook. With a 15% growth in bank credit, GDP is expected to rise by 5.4% in 2019. However, if credit increases at a slower 12%, then growth in 2019 should stand at around 4.7%.