Economic and Financial Situation of Georgia - March 2018

Economic and Financial Situation.

After a dull year in 2016, the results of the year 2017 are positive and have been welcomed by the IMF during a program review mission in December 2017: growth in 2017 should indeed accelerate to 4 , 8%, after two years of weak growth (2.9% in 2015 and 2.7% in 2016).
With better than expected tax revenues, the budget deficit is starting to shrink. The current account deficit falls below 10% (compared to 13% in 2016) thanks to improved business results and continued growth in tourism.


The level of FDI is also growing strongly.


Inflation has resumed in 2017 and is above the Central Bank's targets, but this increase is mainly due to tax reforms and the Central Bank is responding effectively.
The level of international reserves remains low, considering an overvaluation of the national currency of about 15%, but goes back slightly under the effect of the program of the IMF, validated in April 2017, to slightly exceed 3bn ds, that is 4.8 months d 'import.
The banking system continues to be profitable and to have adequate capital and liquidity ratios, including IMF staff, judged by all. Already strong supervision is strengthening.


The business climate is healthy, but foreign investors are not moving to the manufacturing sector.

Growth accelerated in 2017 to 4.8% and is expected to stabilize above 4% in 2018

In Georgia, continued shocks to its trading partners limited growth in 2016 despite fiscal stimulus and increased public and private spending.


After rising 2.9% in 2015, GDP grew by 2.7% in 2016 to reach 14.3 billion USD. Growth nevertheless rebounded to 4.8% in 2017, to approach USD 15 billion, and would reach 4.2% this year. GDP growth in 2017 was mainly driven by the improved economic situation of Georgia's partners, notably the European Union and Russia.


Net exports contributed positively to economic growth thanks to an increase of almost 30%. The tourism sector grew by approximately 27%, thanks to a significant increase (18.8%) in the number of visitors, which now stands at 7.6 million.


Private consumption was driven by the increase in migrant remittances (19.8%). Improved consumer and business confidence has led to public and private investment.


Other sectors with potential for development are also agriculture (9.3% of GDP), still suffering from a lack of investment, the fragmentation of farms, a cadastral system that is not very transparent, listing a quarter of the land and in the absence of a law on the ownership of the land.


The authorities expect a 4.8% growth for 2018, while the international consensus expects a slight slowdown given the good figures of 2017.

The current account deficit falls below 10% of GDP but remains high due to a large structural trade deficit.

The current account deficit fell sharply in 2017, falling for the first time below 10% (9.8%), after 12.8% in 2016. The strong growth in exports offset the slight increase in imports, with the trade deficit rising only 1.4%. However, the latter still accounts for almost 25.8% of GDP. Nevertheless, FDI flows increased by 20.5% in 2017, now represent 10.5% of GDP, and allow the financing of this large current account deficit.


In detail, following a year in 2016 that saw a fall of 4% in exports not offset by the drop in imports (-0.6%), the first 9 months of 2017 are marked by an increase exports compared to the same period of the previous year (+ 22%, to 1.9 billion USD). However, imports also increased sharply over the same period (+ 6.9%, to 5.6 billion USD): the trade balance remains structurally deficit (-3.7 billion USD). Turkey remains by far the leading partner country with 16.2% of Georgian trade and Azerbaijan is in 4th position (6.9%) after Russia and China and in front of Germany which holds 5.3% market share. Despite a diversified economy, its trade remains low in value with a total volume of foreign trade that does not exceed 10 billion USD in 2016. The EU remains its first customer, and absorbs 27% of its exports in 2016 (despite a decline 11.5%, while Russia recorded an increase of + 26.6%). Georgia continues to diversify its markets: after Turkey, a free trade agreement with China was ratified in May 2017 (after exports jumped 35% in 2016). Discussions with India could open in the near future. Georgia wants the creation of an export credit agency.


In addition, remittances also rose sharply (+ 19.8%, or 9.1% of GDP). The main emitters of remittances are Russia (33%) and the European Union (30.7%). They are mainly allocated to communication and transport networks (39%), the energy sector (12%) and the construction sector (10%). Azerbaijan is the largest investor in Georgia (35% of FDI), followed by Turkey (17%) and the United Kingdom (7%).

The GEL held up against the dollar despite higher than expected inflation.

The GEL held up against the dollar in 2017, despite a slight depreciation in October and November. The IMF estimates that the lari is still overvalued by 12-15%. The Central Bank is reactive and continues to make recurring interventions on key rates. In 2016, while inflation (1.8%) was well below the 5% target, monetary policy gradually eased. In 2017, inflation stood at 6.7% in g.a, a figure above the Central Bank's target for 2017, set at 4%. This led the Central Bank to raise its key rates in three times in 2017, to reach 7.25% today. Thus, the intervention of the Central Bank has been effective in containing inflation, of which nearly 40% of the increase comes from fiscal measures (including excise duty increases). In 2018, the Central Bank's target is 3% inflation. The risks are relatively moderate due to a good anchoring of expectations, the credibility of the Central Bank and a positive base effect. The appreciation of the GEL last summer and the IMF program have increased international reserves in 2017. They now reach about 3.2 billion dollars, or 3.7 months of imports. They should continue to strengthen in 2018.

The agreement with the IMF on the "Extended Fund Facility" program is expected to result in significant international financing.

On April 12, 2017, an Extended Fund Facility program ($ 285.3 million in 7 tranches over 2017-2020) was approved by the IMF's Board of Directors. The conditionalities focus on strengthening the supervision and resilience of the financial system, fiscal consolidation (without penalizing public investments) and the introduction of a second pillar in the pension system. The program also provides for significant budget support from international donors: World Bank US $ 100 million per year, with 2 Development Policy Operations in 2017; European Union (US $ 150 million per year over 2017-2018); others, notably AFD and Asian Development Bank (USD 162 million in 2017-2019) and more recently the AIIB. A near doubling of international reserves is targeted. After the first review of the program in December 2017, the IMF's satisfaction is complete, as all objectives have been met by the country.

The banking system has its own funds and comfortable provisions. Already strong supervision is strengthening. The objective remains the (dedol) larization of the system.

The banking sector is made up of 17 banks, but only two players account for more than 80% of the market. This weak competition in the banking market leads to additional costs in access to credit, especially in GEL, whether for individuals or businesses. The sector is making significant profits (ROE profitability above 20% in 2017).


The stability indicators remain satisfactory, with a solvency ratio of 16.5% in 2017. The share of doubtful loans according to the IMF methodology has slightly increased, to 3.7% at the end of 2017, but remains at a low level. Provisions represent 3.2% of the portfolio. The quality of the portfolio would be explained by a cautious approach of the banks, as well as by the effective possibility to execute the collateral if necessary, which stimulates the discipline of payment. However, difficulties seem to be emerging for large companies, having resorted to significant debt, especially those in non-exposed sectors indebted in foreign currencies. In fact, dollarization remains the main focus of the Central Bank (64% of deposits are denominated in foreign currencies). To cope, foreign currency deposits are subject to a larger reserve requirement and foreign currency credits to a weighting of 175% in the calculation of ratios. Among the additional measures put in place in 2017:


• the introduction of liquidity coverage ratios (less stringent for local currency deposits),
• the obligation to display prices in lari and not in dollars,
• strengthened limits on foreign currency mortgages,
• and prohibition to advertise for dollar loans.


The system's policy of system decarceration is conducted by the Central Bank voluntarily and the first results are already being felt (a decrease in the share of deposits in USD in January 2018). Nevertheless, this policy will necessarily work in the long term. More generally, the supervision will be consolidated: return of financial stability in the competence of the Central Bank, establishment of specific solvency ratios for systemic banks and gradual increase of the minimum capital of banks, regulation of the sector non-bank financial etc

In spite of a healthy business climate, FDI is not geared towards the manufacturing sector and the economic fabric (a hundred large companies, few SMEs, and a myriad of micro-enterprises and agricultural self-entrepreneurs) is slowly evolving.

The business environment is welcomed by all national and international players. This impression is reinforced by the country's Doing Business ranking, which ranks Georgia ninth in the world. Transparency and ease in business is a government priority. Corruption is not one of the points raised by companies when they present their difficulties in the country. It was successfully eradicated during the Saakashvili era even though signs of market concentration appear. Georgia ranked 46th in the Transparency International Corruption Perceptions Index 2017 (-2 positions compared with 2016), the highest ranking of the CIS MS. Some shortcomings are noted in the area of ​​commercial court justice, as the training of judges is considered insufficient. In terms of reforms, the authorities announced the deployment of a 4-point program, targeting in particular road infrastructure, strengthening the role of the private sector in the economy, public administration and education.


- Georgia is unanimously considered a "good reformer" among the second wave countries (ten new European countries and beyond), and is mobilizing to become a good economic "performer".

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