Georgian Economy: Weekly Update from TBC Bank Chief Economist

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June annual CPI inflation print came in at 12.8%, being 0.5 percentage point lower than the one in May, though mainly on the back of the base effect as June monthly seasonally adjusted annualized inflation stood at still elevated 18.2%;
  • Nevertheless, the moderation of international commodity prices and PPI in Georgia, higher probability of global slowdown and the stronger GEL enables us to argue that it looks going forward monthly consumer price increase would be somewhat close or later during the year even below the 3% target;
  • As for the annual YE CPI, we lower the latest baseline from around or slightly above 9.5%, to around 8.5% assuming some further decline in commodities and a few percentage points stronger GEL;
  • What would that imply for the GEL? On the rates side, we would bet on stronger cuts by the end of the year than only 25 basis points projected earlier;
  • On the one hand, the rates should be based on a forward looking approach and if our inflation outlook is accurate, that’s a strong argument in favor of a more dovish stance;
  • Furthermore, the Larization goal is a cut supportive as well as expectation of still strong inflows;
  • On the other hand, still high annual inflation and the perception should be seen as an argument for the NBG to postpone more aggressive easing to next year;
  • Overall, our best guess is that this year the policy rate will decline from 11 to around 10.25%, instead of 10.75 projected earlier;
  • On the GEL exchange rate side, we remain slightly, but still bullish;
  • In recent days the USD has strengthened against regional currencies. Important to recheck whether our latest slightly, but still bullish outlook for the GEL still holds;
  • Based on TBC Capital 3 pillar approach we remain bullish from the net inflows perspective. As well as regarding inflation, though now to relatively less extent and only in the near term;
  • In fact, we expect an inflation pillar to gradually turn to GEL negative as we at least do not rule out deflation a year ahead;
  • Well, at the same time, after prolonged years of above target inflation, some undershooting, especially when primarily being exogenous should be well tolerated, based on our judgment;
  • As for the GEL REER, the GEL still looks moderately undervalued from the long term perspective, especially when looking at the PPI best estimate, which should be a superior to the CPI one if the competitiveness is a concern;
  • Therefore, we still believe there is further room for the GEL appreciation;
  • While the left side of the “Dollar Smile” indicates the stronger greenback, as it is already expensive, further appreciation is probably less likely, at least in the medium term;
  • In the near term, the outlook is highly uncertain. In particular, besides the higher energy prices and the worsening of the Euro Area trade balance, along with the ECB statement to address the fragmentation in the region as the peripheral yields soared, now the EUR/USD real yield differential also supports the King Dollar;
  • What can we say? Probably the best advice would be not to be procyclical and bet more on medium term indicators, which clearly indicate that the EUR/USD pair should advance;
  • Namely, as the greenback gains more, a higher share of USD in liabilities and lower in assets looks to be a smart move;
  • For more precise portfolio shares, our earlier estimates should broadly hold.
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