The objective of the exercise was not to assess the relevancy of the plan and/or recommend alternative ways to rescue the troubled economy, but to check that the numbers add up and government spending directed towards revival of the economy and supporting vulnerable groups of the population is close to what they announced during the 24 April presentation.
We will proceed item by item though the Government Plan, discuss the methodology of cross-checking the figures and come up with our estimate of spending for 2020. We are focusing on 2020 because the key feature of a good anti-crisis plan is its urgency and speed of action.
– Growth of the Economy
The Government states that the COVID19-related lockdown will result in -4% economic growth. We estimated economic growth basing our calculations on the budgeted 2020 GDP and estimated potential change in each item of the calculation based on an “educated guess” (conservative estimates). As a result of our calculation (see Table 1 enclosed), we estimate GDP growth, if no action is taken by the Government, will be -4.65%, which translates to GEL 3,480 mln loss in production.
– Subsidies for Utility Costs and Hedging Food Prices (GEL 165 mln)
The Government announced that GEL 150 mln was spent on subsidizing all utility bills for the period of three months to families with electricity usage of up to 200 kwt/month and natural gas usage of up to 200 m3/month. Even though official sources referred to GEL 132 mln spending before, we are not questioning the government figure.
Additionally, GEL 15 mln was or will be spent on food price hedging (again, since it is difficult to check, despite an obvious increase in food prices we are not questioning this figure).
– Helping the Tourism Sector (GEL 100 mln)
The Government has announced tax deferrals for the tourism sector till November 2020 amounting to 90 mln. Since deferrals are not really a cost, and they will have to be paid by the businesses in 2020, we remove this cost from the calculations.
Furthermore, the Government has pledged to finance 80% of interest payments during the next 6 months for loans issued to hotels, and this is estimated to be GEL 10 mln.
Total loans issued by commercial banks as of March 2020 to hotels and restaurants is GEL1.4 billion. Assuming 50% of these loans are for hotels and assuming an annual blended interest rate of 8%, total interest expense should be around GEL 30 mln, and 80% of it is around GEL 25 mln. However, the 10 mln support is very welcome.
Our conclusion is that, according to the Plan, the Government will spend 10 million on this item in 2020.
Table 1. Effect of COVID19 Lockdown on 2020 GDP (No Action Scenario)
– Import Tax Deferral for Automobiles (50 mln)
The Government will defer import taxes payable for imported cars till September 2020.
Again, this is deferred tax and it is not counted as a cost to the Budget. The Government will spend 0 in 2020.
Rescheduling of Commercial Bank Loans and Hedging of Construction Material Costs for Infrastructure Projects (GEL 200 mln)
Rescheduling commercial bank loans is made by agreement between commercial banks and borrowers. There is no government monetary involvement in the process.
On the other hand, the 200 mln price tag for hedging construction materials part of the infrastructure projects seems odd, to say the least. Indeed, total budgeted expenditures on infrastructure projects in 2020 are GEL 1.6 billion, of which GEL 735 mln is donor assistance (in hard currency, therefore does not need hedging). If we make the oddest assumption that all the remaining expenditures of GEL 870 mln are earmarked for construction materials, and similarly the odd assumption about the End of Year Exchange Rate at GEL 3.5 per USD 1, the maximum loss the Government can “hedge” is GEL 113 mln. Furthermore, if Currency Forwards are used for hedging purposes (normally, this is the way to hedge FX exposure), another GEL 40 mln will be saved.
We conclude therefore that maximum government spending on this item will be GEL 80 mln.
– Assistance to Laid off Staff and the Self-Employed (GEL 535 mln)
The Government has announced that GEL 200 support per month for a maximum of 6 months will be paid to people who were laid off (350,000 citizens) or went on unpaid vacation after the announcement of the State of Emergency in March 2020. Additionally, GEL 300 one-off support will be paid to self-employed people who have lost their source of income during the lockdown. The budget for the first item is GEL 460 mln and the second is GEL 75 mln.
While the second item has already raised many questions from society, we will not delve into discussions of how hard it can be to prove a person was self-employed and has lost their source of income as a result of the lockdown. Instead, we assume that a maximum of 1,000 such persons can be physically identified by government agencies per day (if there are any such agencies), therefore maximum spending on this item in 2020 could be GEL 45 mln.
As regards the unemployed, I made the following calculations to come up with a realistic estimate of the budget:
Average employed worker productivity in Georgia is GEL 42,000 per annum. That means, if 350,000 workers are laid off for 6 months, the economy will lose not the estimated GEL 3.5B but GEL 7.4B (and would result in -16% growth in 2020). In order for the economy to lose 3.5B the average unemployed months should be 2.4 months. Therefore, spending on this item will be GEL 165 mln. Total for both: GEL 210 mln.
– Payroll Tax Subsidies (GEL 250 mln)
The Government pledges to subsidize 100% of income tax for salaries up to GEL 750 per month and subsidize payroll tax attributable to GEL 750 per month if the salary is above 750 but less than 1,500 per month. The announced budget is GEL 250 mln.
While information on salaries in the private sector is virtually impossible to obtain, we used an income distribution approach to estimate average salaries of people employed in the private sector (total 710,000 people). While Table 2 bellow summarizes the calculations, our estimated cost for this item should be GEL 370 mln.
Table 2. Income Distribution Approach to Calculating Subsidies for Payroll Taxes
Social Assistance and Increase in Pension Payments for the Retired (GEL 333 mln)
The Government announced an increase of GEL 20 per month for retired people aged 65 to 70, and GEL 25 for people aged above 70. This will take effect in 2021.
Additionally, the Government has announced special social assistance for vulnerable groups of the population amounting to a total of GEL 83 mln.
While support for vulnerable groups is traditionally difficult to estimate and monitor in any country, an increase in pensions is for sure not planned in 2020. Therefore, total estimated cost of these items in 2020 is GEL 83 mln.
Support for the Private Sector (GEL 1,500 mln)
The Government has announced that surplus VAT return requests will be processed without previously onerous bureaucracy and will amount to GEL 600 mln. Furthermore, National Bank of Georgia pledges to provide GEL 600 mln liquidity to the banking sector. Finally, a credit guarantee scheme amounting to GEL 300 mln will continue to function under the Produce in Georgia Government Programme.
While removal of bureaucratic burdens is appreciated, business has already had a lawful right to return such surplus. Furthermore, even while it is still considered a goodwill action by the Government it is by no means at a cost to the Government.
In addition, GEL 600 mln liquidity refers to Repo operations announced by NBG in March 2020. The nature of the Repo operations implies the provision of GEL in return for receipt of hard currency from commercial banks. Therefore, this is not a cost.
Finally, the credit guarantee scheme has already been (mal)functioning for several years, and there is a very low probability that the Government will have any cost related to it in 2020.
We conclude that there will be zero spending from the budget for these items in 2020.
Support to Agriculture (GEL 40 mln)
The Government has announced that the micro-grants programme for Agriculture will be expanded and the budget will increase to 40 mln. Furthermore, the credit guarantee scheme will continue functioning and loans totalling GEL 50 mln will be issued for annual cultures production.
While doubting that any sum will be spent on these items in 2020, we leave the Government figures unchanged at GEL 30 mln for grants (an increase to 40 mln from the 10 mln budgeted) and GEL 10 mln for credit guarantees (only the interest portion is financed by the Government).
To summarise, while the Government announced the following support for the economy:
– GEL 1,035 mln as Social Support, and
– GEL 2,150 mln as Direct Support for the Economy,
Based on our estimates, the real maximum additional spending from the budget in 2020, to fight the consequences related to the lockdown will be:
– GEL 380 mln Social Support, and
– GEL 420 mln Direct Support for the Economy.
About author: Vasil Revishvili, Managing Partner and CIO At Thales Investments
Vasil Revishvili holds the position of managing partner and CIO at Thales Investment OÜ, an Estonian asset management company. Vasil is pioneering the introduction of an asset management service in Georgia in partnership with TBC Bank, Georgia’s largest bank. Formerly, Vasil was head of Asset and Wealth Management at the Bank of Georgia, and Head of the Investment Risk Unit and later a Senior Investment Manager for the flagship absolute return fund at Pictet Asset Management in London and Geneva. Vasil received his Master’s degree in finance from the London Business School, and an undergraduate degree in applied mathematics and computer sciences from Tbilisi State University. He has also been designated as a Financial Risk Manager by the Global Association of Risk Professionals.