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Monthly Update: June 2019
Global growth projections have weakened and major central banks turned more dovish. At the same time, the USD stepped back and the appetite towards emerging markets increased.
Georgia’s GDP growth came in at 4.7% in May. While primarily due to one-offs, exports and the construction sector were weak, the growth of tourism and remittances were solid. Also, fiscal was expansionary as expected coupled with some signs of stabilizing credit. Despite the expansionary fiscal stance, external balance continued to strengthen in May following the sizeable CA balance improvement in Q1 2019.
After a continued decline, the number of visitors from Turkey went up sharply YoY in June, reaffirming the growth projection of the tourism inflows even if the inflows from Russia are halved. In fact, before May 2019, when tourist arrivals spiked to 18% YoY with the key contribution of Russia, the growth of tourists was quite moderate during a couple of months.
After the announcement of the restrictions on direct flights from Russia and some portion of wine exports, already undervalued GEL weakened further and later started to appreciate back. Going forward, we remain bullish on the GEL for three reasons. First, the assessed loss of net inflows at around 200 mln USD over the next year is not large enough to lead to the deterioration of the external balance. In fact, it is still expected to strengthen, though at a slower pace and also supported by less FX interventions by the NBG. The second, inflation is already above the target level and, in our view, is likely to pick up further unless the GEL strengthens. Assuming stable EUR and other regional currencies against the USD, and approximately the same commodity prices, inflation is expected to be up to 5% by the end of 2019 if the USD/GEL is somewhat below 2.7. And third, the NBG has already bought more than expected amount of reserves for the near term. While one should not bet on the central bank selling the reserves, the purchases at recent exchange rate are highly unlikely in our view. In addition, the probability of the rate hike has increased as exchange rate at current levels is likely to put upward pressure on inflation.
As for the GDP growth projections, even under the assumed decline of inflows from Russia, around 4% seems a reasonable target over the next 12 months with somewhat higher growth rates for FY 2019 and 2020.Download File