TBC Capital has released an update from the Chief Economist – “Timely or Delayed Solution?” The report is the first macro-economic, analytical document in Georgia, which deals with the impact of the current events in Ukraine on the Georgian economy. The publication discusses two possible scenarios of events and the relevant analysis in the context of the economic situation in Georgia.
Timely solution scenario
• Relatively short-lived conflict. Part of Ukraine is occupied, although hostilities no longer continue.
• Sanctions are imposed on Russia, but Russia continues to export energy resources. Disconnection of major banks from SWIFT is temporary.
• Only gradual easing of other sanctions takes place.
• In contrast to the shock of 2014-2015, prices for oil and other commodities are high, which is important for both economies. The price of Brent oil reaches $ 105, and will decrease to $ 85 by the end of the year.
• This scenario is similar to our previous estimates, but with a more negative impact on economic growth and currencies.
• In 2022, the Ukrainian economy will shrink by 10-15%, while the Russian economy will shrink by about 4%. The ruble and the hryvnia are depreciating by 30 and 20%, respectively, with possible further depreciation in the initial period, especially in the case of the ruble.
Impact on the Georgian economy
• In 2022, GDP growth in Georgia will decrease from 6% to 3.5-4.0% and the lari will depreciate by 5% against the dollar, to about 3.15. However, temporary depreciation to 3.3-3.4 in the initial period is not ruled out.
• In this scenario, National Bank interventions and foreign-funded fiscal stimulus are moderate, if at all necessary, as the net inflow deficit is about $ 400 million compared to the baseline scenario before the 2022 conflict and about $ 170 million better than in 2021.
• Depositing foreign currency deposits and loans in GEL is only small.
• Inflation in 2022 is only slightly higher than the target and at the end of the year the monetary policy rate will decrease from the existing 10.5% to about 9%. However, it is possible that the rate will be tightened by 0.5 percentage points, rather than a relatively timely solution – the scenario will become more visible.
• Given that the shock is exogenous, i.e. it is not like a pandemic caused by economic and financial factors, the 2023 recovery is also strong.
Delayed solution scenario
• The conflict lasts for more than a quarter.
• Sanctions are quite severe, including disconnection from SWIFT and export of energy resources.
• Russia’s internal payment system, cryptocurrencies and other technologies do not serve as an alternative to SWIFT, although payments within the country continue unabated.
• To mitigate the impact of sanctions, China’s support is out of place and Russia is losing more than half of its energy exports.
• More than half of the country’s international assets are seized and Russia uses only part of them to shock.
• US and OPEC increase energy supply.
• However, prices are still rising. The price of Brent oil reaches $ 150 and is set at $ 120 by the end of the year.
• In this scenario, the Ukrainian economy is shrinking by about 20% and Russia by 7-10%. The ruble and the hryvnia are depreciating by 50 and 30%, especially in the case of the ruble, with a high probability of more temporary depreciation.
Impact on the Georgian economy
• In this scenario, the estimated net loss from foreign exchange inflows is $ 740 million compared to the baseline scenario existing before the 2022 conflict and $ 110 million compared to 2021.
• However, in this case the depreciation of the lari is not taken into account, which reduces imports, albeit at the expense of less economic growth in our estimation, as the main impact is not from the substitution but from the income effect.
• With only a small depreciation of the lari by 5-10%, the 2022 growth will be reduced from the pre-conflict 6% forecast to around 0.5%, and the net inflow will be offset by National Bank interventions and government external funding. In our estimation, a total supply of $ 550 million is sufficient.
• In a significant depreciation scenario, the lari depreciates to around $ 3.5 against the dollar, with the probability of additional temporary impairment being accounted for, and the net inflows are about halved, although economic growth is slightly negative.
• In addition to the external shock, there is also a risk that an increase in foreign currency deposits, and at the same time, GEL loans, will exacerbate the shock, as it did in 2020-2021, when the pandemic deficit increased by about 50%.
• It is possible to use a currency risk insurance mechanism to balance this shock amplifier, although this tool is not widely used in international practice and the probability of its introduction is low.
• In addition, a weak ruble and hryvnia may also put pressure on the lari.
• In terms of the monetary policy rate, a tightening of about 1.5-2.5 percentage points is expected, albeit with a significant easing towards the end of the year, when inflation will be higher than the target, but it will not exceed the single-digit rate.
The full version of the publication in Georgian is available at the following link
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