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Developments in Turkey and the Impact on Georgia’s Economy
Recent developments in Turkey, an important economic partner of Georgia, raise number of questions about the potential spillovers. Georgia’s total exposure to Turkey via currency inflows is 4-5% of GDP – these account for approximately 8% of all currency inflows into Georgia. The share of total imports from Turkey is around 9% of GDP – accounting 17% of total imports of goods. The impact on Georgia’s economic growth is assessed as being around 0.5% of GDP. As things stand on August 15, with USD/TRY at 6.2 USD/GEL exchange rate below but close to 2.6 should be sufficient to offset the wider negative impact of the recent TRY depreciation. These estimates are supported by the following arguments:
- The increasing importance of global value chains have resulted in a lower exchange rate elasticity of trade flows, including, the case of Turkey.
- The existing structure of exports of goods suggests that the impact on exports should be limited.
- The purchasing power of visitors from Turkey is expected to decrease, however, the overall growth in the number of visitors remains strong and is expected to be relatively unaffected.
- Remittances should decline, however given the small size of it, the impact on overall growth is expected to be limited.
- No material negative impact in terms of FDI is expected;
- While the level of imports from Turkey to Georgia is substantial, the overall weaker TRY is expected to lead to a substitution of imports from other countries, rather than putting competitive pressure on domestic producers. Furthermore, due to the large share of capital and intermediate goods in total imports from Turkey, the TRY depreciation could also be viewed as a positive supply side shock.
- The GEL/TRY exchange rate appreciated substantially, even in real terms, though the GEL REER at the USD/GEL exchange rate below but close to 2.6 is assessed as being fairly valued.
- As inflation is close to its target, any possible overreaction of the market that would translate into increasing inflation pressures is expected to be met with the policy response from the NBG.
The report includes the recent depreciation of the RUB, taking into account only its direct effect on the GEL REER. The broader impact on the economy is not discussed in detail, but it is important to mention that, as of today, developments related to the Russian currency are not that challenging. Also, while the contribution of Russia in total external inflows was significant in 2017, in the first half of 2018 that contribution decreased significantly; however, total inflows increased by a remarkable 25.2% YoY in USD terms, thanks to Georgia’s well diversified sources of external inflows and the increasing share taken by new markets.