Lari Depreciation Reverberates in Consumer Inflation, SP Advisors

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The FINANCIAL — The Georgian economy has digested the external shocks stemming from recessions in Ukraine and Russia at an entirely reasonable cost with a 22% YTD currency depreciation. In the coming months the weaker currency will enable keeping the country’s C/A gap under control, SP Advisors predicted in just released new outlook on Georgian economy. “On the downside, 8M15 GDP growth of 2.8% yoy was well below the economy’s potential and we steadfastly believe a new wave of structural reforms is badly needed to reinvigorate growth”.

The weaker lari should also pump up exports and the economy overall, although the effects will not be significant and will be stretched over some period, agency said.

Sluggish growth through 1Q16, with some support from the weaker lari

Economic growth has been volatile and largely unimpressive since the start of 2015 – GDP expanded 2.3% yoy in August and 2.8% yoy in 8M15. Nearly all demand-side GDP components except exports are growing at low single-digit rates, by our estimates. The key drag on the economy remains the decline in real exports – a direct consequence of regional recessions.
“We do see the lari’s YTD depreciation supporting exports, but it will take time before producers regain their foreign market niches”, SP Advisors said.
“Private consumption will continue to be restricted by a material decline in migrant remittances, which in the past have fueled a large portion of new demand. We upgrade our projections for 2015 GDP growth from 2.1% to 2.7% on slightly better than expected 8M15 numbers and maintain our 2016 projection at 5.0%. We note, however, that any acceleration of growth next year is heavily dependent on the government’s ability to enact structural reforms and attract FDI”.

Lari depreciation reverberates in consumer inflation

Inflation accelerated to 5.4% yoy in August before inching back to 5.2% in September.
“We still see risks of a re-acceleration to 6.0-6.5% by the end of 2015 as negative price effects of deep currency depreciations typically last 2-3 quarters. On the other hand, prices are unlikely to deviate materially from the NBG’s 5.0% inflation target in the foreseeable future. Any downside risks (acceleration) would be mitigated by sluggish domestic consumption”, SP Advisors said.

External imbalances to narrow after the lari’s expected depreciation

“The lari’s 22% YTD decline was entirely expected, in our view, based on developments in the region. Their effects were most clearly visible in foreign money transfers (-27% yoy in 8M15) and weaker exports (-24% in 8M15; -10% yoy excl. vehicle re-exports). The NBG wisely allowed the exchange rate to absorb the shock (despite strong political pressure) even though it was forced to sell USD 27 mln via its only intervention in September (its first since April)”.

“The weaker lari should prevent widening of external imbalances in 4Q15-2016, and any rate appreciation should be unwelcome. The current account deficit will remain at a projected 13-14% of GDP in 2015 and 2016 (vs. 11% in 2014). Meanwhile, Georgia’s constant need to secure external funding to close the C/A gap is its ever-lasting challenge. Both FDI and debt inflows have remained sufficient to prevent any major currency crisis thus far and, as a severely underpenetrated consumer market, we see no fundamental barriers to raising new funding in the foreseeable future either.”, SP Advisors said.

The NBG’s gross international reserves remain at a healthy USD 2.4 bln

(-9% yoy), equal to 2.6 months of future imports. Notably, Georgia is barely indebted to the IMF (c. USD 110 mln repayable in small installments starting from end-2017). We expect the NBG to maintain the current level of reserves through end-2016, which will offer a healthy buffer against external shocks. Major pressures on the FX rate are unlikely to emerge in the near-term and we believe the currency will remain fairly stable in the near future. “We project an FX rate of GEL 2.35/USD for both end-2015 and end-2016, broadly in line with our February projections.”, SP Advisors said.


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