Jun 5, 2019

Monthly Update: May 2019

Monthly Update

  • Markets are pricing two rate cuts in the USA in 2019. The Eurozone outlook has also weakened, however, not that strong of a change in policy stance is expected. Despite the lower interest rates and intensifying talks on the US recession, the USD continued to appreciate as traders are investing in the “safe haven” status of the currency. Nevertheless, over the medium term, weaker USD still remains TBC Research’s baseline scenario (see TBC Economic Review: Insight #3). Inflows to Georgia strengthened in April. Falling oil price is likely to have more benefits for Georgia as its oil exporting economic partners are better prepared for oil’s ups and downs.
  • GDP growth stood at 5.1% in April. Together with supportive external sector, strong fiscal stimulus has contributed to a large extent, while credit expansion continued to moderate. TBC Research 2019 growth projection stays unchanged at 4.7% with a 12.0% increase in credit (see TBC Economic Review: Insight #10).
  • Consolidated budget posted a deficit of 140.3 mln GEL – an estimated 4.2% of the same month GDP. The wider budget deficit continues to support the growth in 2019 together with the advance payments made at the very end of 2018. 
  • Exports increased sharply by 34.2% YoY in the USD terms (46.6% and 49.0% in the EUR and the GEL) though with a significant contribution of re-exports. While imports growth has picked up, the increase was still weak compared to what a strong GDP growth implies. The trade balance continued to improve. 
  • The number of tourists increased by 4.2% in April, while the number of visitors arriving by plane went up by 13.8% YoY. The growth remained the highest from the EU with 28.7% YoY, while with an 11.0% increase, the CIS made the largest contribution balancing the negative impact of Turkey and Iran.  
  • Remittance inflows growth has doubled reaching 10.1% in April in the USD terms. When expressed in the EUR and the GEL, the growth rates stood at solid 20.3% and 22.3%, respectively.  
  • Credit growth continued to moderate with the total bank loan portfolio up by 12.1% YoY in April 2019, excluding the FX effect. Together with introduced regulations, one-offs and some normalization of credit growth in the business sector after the cyclical pick-up in 2018 also have played a role. The GEL liquidity remains high primarily thanks to the strong fiscal spending. After slowing in the second half of 2018, the Larization has started to pick-up again. 
  • The Financial Stability Committee of the National Bank of Georgia on its May 29, 2019 meeting decided to keep the countercyclical buffer unchanged at 0%. According to the Committee, in line with the expectations, the credit growth is moderating reflecting the recently introduced retail lending regulations.
  • The annual inflation edged up to 4.7% YoY in May 2019 compared to the 4.1% in the previous month. An important driver can be the weaker GEL real effective exchange rate coupled with the strong GDP growth. At the same time, without 1.4 pp impact of a higher excise tax on tobacco, the inflation stood close to the central bank’s target. Going forward, together with the GEL REER dynamics, the volatility in commodity prices such as oil and cereals will have significant impact on the consumer prices.  
  • The NBG has not intervened in the FX market, neither via direct interventions nor via FX options. Furthermore, the NBG decided not to sell the GEL call options to be exercised in June, giving additional room for the GEL to appreciate.
  • As of May 31st, the estimated GEL REER depreciated substantially and is likely to strengthen. TBC Research “a bit more than random walk” exchange rate projection stays approximately the same with the USD/GEL at 2.7 or somewhat stronger GEL for both the end of the period and the period average of 2019 (see TBC Economic Review: Insight #9).
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