The FINANCIAL — The Georgian economy continues to lose steam: GDP growth slowed to 1.3% yoy in 3Q13 from 1.5% yoy in 2Q13, according to the relates report by Vitaliy Vavryshchuk, Head of Research at SP Advisors.
The FINANCIAL — The Georgian economy continues to lose steam: GDP growth slowed to 1.3% yoy in 3Q13 from 1.5% yoy in 2Q13, according to the relates report by Vitaliy Vavryshchuk, Head of Research at SP Advisors. By our estimates, export is the only demand component that continues to substantially contribute to GDP growth. Apart from the increase in commodity exports (est. 6-8% in real terms in 9M13), growth in tourist visits (+25% yoy in 9M13) is a very bright spot.
A noticeable drop in demand for investment goods remains the key impediment – the government hasn’t yet revised its large-scale investment project plan and has kept infrastructure spending at a minimum, author believes.
At this point, the projects currently on hold are unlikely to be re-initiated in the coming months, which suggests little chance for a major revival in economic activities through 1H14.
"We estimate that private household demand has had a marginally positive contribution to GDP growth YTD, but it should lend greater support to the economy going forwards. Household income growth remains fairly strong as average salaries added 10% yoy in 2Q13 which, given the continued deflation, implies even stronger growth in real terms”, Vavryshchuk wrote.
"Overall, we downgrade our 2013 GDP growth outlook to 1.7% yoy from 3.8%, but continue to expect an acceleration to 2.5-3.0% in 2014 on stronger private consumption. Robust retail lending by banks (retail portfolio up 20% yoy at end-September) should also support stronger consumption and is also a sign of positive consumer sentiment".
C/A gap narrows sharply on a decline in imports
The Georgian economy has seen an unexpectedly powerful adjustment in the C/A deficit despite virtually no change in the exchange rate. The C/A gap narrowed to USD 0.45 bln in 1H13 from USD 1.0 bln in 1H12. The contraction is mainly due to a narrowing of the merchandise trade deficit as imports of investment and consumption goods slowed while commodity exports rose 7% in nominal terms.
"Given the stronger-than-expected trade adjustments we upgrade our projection for the 2013 C/A deficit to 6.9% of GDP from 11.3% previously. That would leave the country’s smallest C/A gap in the last decade”, author said.
Capital inflows to Georgia have also subsided. While FDI inflows were relatively unchanged yoy in 1H13, corporate sector borrowings have plummeted. Three corporate Eurobond issues last year paved the way for heavy capital inflows that would be difficult to match this year.
"We still expect a strong external financing surplus (combined C/A and financial account balances) of about USD 0.4 bln in 2013. NBG reserves will continue growing to exceed USD 3.1 bln (+9% yoy), an all-time high, by end-2013. The NBG continues to repay its IMF debt smoothly, and USD 440 mln of IMF funding remains outstanding. The repayment schedule is benign, with tranches stretched over the next two years”, Vavryshchuk wrote.
Still committed to fiscal consolidation
Georgia’s fiscal policies remain prudent even though the 2013 budget plan won’t be met. Central budget tax revenues were flat yoy in 8M13 while the plan lays out 10% yoy growth for the full year. The government addressed the challenge by cutting current expenditures. A sizable increase in public wage outlays (+13% yoy in 8M13) and social protection (+16%) was more than offset by cuts in purchases of goods and services by government (-40%).
The government is targeting a budget deficit of 2.9% of GDP for 2013. Based on current performance this seems achievable.
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