Jan 9, 2019

Monthly Update: December 2018

Monthly Update

  • Fed revised the number of rate increases for 2019 from three projected in September to two in December 2018, reflecting the increasing concerns on slowdown in the US economy. Economic activity continues to slow down in Turkey accompanied with CA and budget surpluses. Growth remained solid in Russia with GDP up by 1.8% YoY in November, notwithstanding the slump in oil prices. Lower oil prices are likely to have only moderate impact on inflows to Georgia from oil exporting countries as in many cases spending caps are created to insulate economies from oil’s ups and downs. At the same time, lower oil import bill positively affects the trade balance and economic growth in Georgia.
  • GDP growth slowed to 2.2% YoY in November 2018 following 6.7% in October 2018. A slower growth in November is to be primarily attributed to a weaker domestic demand on the back of the one-off decline in construction activity related to some infrastructure projects, likely effectively tight fiscal stance, elevated GEL volatility in November and front-loaded lending in October. Also, lower exports in some high domestic value added categories have contributed to the growth negatively.  
  • After surpluses in November 2017 and October 2018, in November 2018 budget deficit amounted to around 25 mln GEL, an estimated 0.7% of the same period GDP. The positive impact of relatively loose fiscal stance on growth should become more visible in coming months.
  • The latest reads of consumer and business confidence indices somewhat weaker likely due to USD/GEL volatility and the upcoming lending regulations.
  • Gross exports of goods in USD terms rose by 19.6% YoY, while imports went down by 3.1% YoY in November. The trade in goods balance improved substantially.
  • Number of tourists went up by 14.0% YoY in November. While still with moderate share, growth of visitors remained highest from the EU (+35.5% YoY). At the same time, number of visitors increased from Iran by 18.2% YoY, following the declining tendency of the last 5 months.
  • November remittances growth stood at 9.0% YoY with EU remaining as a largest contributor.
  • The tendency of CA deficit improvement also continued in Q3 2018 reflecting normalization of FDI related imports, overall weaker domestic demand and at the same time reasonably strong growth of inflows. CA deficit to GDP ratio stood at 8.3% over the last year. Thanks to gradual improvement in the current account balance and strong seasonal effect, the CA balance to GDP ratio stood at 0.3% in Q3 2018, marking the first time CA balance turned positive. Significant part of CA deficit improvement was related to lower FDI inflows which decreased by 48.2% YoY in Q3 2018.  
  • Bank lending went up by 18.9% YoY in November 2018, excluding the FX effect. Growth of loans was driven by business and mortgage lending as in previous month, however, after sharp increase in retail lending in October as a result of expected regulations, November retail credit growth somewhat slowed.
  • NBG kept policy rate unchanged at 7% during its December 12 MPC meeting. NBG stated that it will continue to normalize the policy stance at a slow pace, depending on the domestic demand as well as the external sector developments.
  • Since the peak of depreciation in November, estimated GEL REER recovered and remained somewhat flat in December. As of the 4th of January 2019 REER remains below its average, indicating that GEL could be still undervalued.
  • Inflation stood at 1.5% in December 2018, down 0.4 PP compared to November. According to IMF’s December 2018 staff report, the authorities anticipate reaching the three-percent target by end-2019—rather than in mid-2019. 
  • On the back of higher inflows, lower oil prices and likely weaker domestic demand, NBG continued to refill international reserves and purchased 65 mln USD in December, equivalent to an estimated 4.0% of the same month GDP. It is likely, that NBG is very close to sufficient level of reserves as outlined in IMF program. 
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