Studi Economici
Georgia

Georgia

Population 3.7 million
GDP 4,765 US$
C
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 4.8 5.1 -5.8 4.5
Inflation (yearly average, %) 2.6 4.9 5.3 2.5
Budget balance (% GDP) -0.8 -1.8 -8.1 -4.8
Current account balance (% GDP) -6.8 -5.1 -9.8 -8.5
Public debt (% GDP) 40.0 42.6 56.3 59.1

(e): Estimate (f): Forecast

STRENGTHS

  • Tourism, agricultural, mineral and hydroelectric potential (almost self-sufficient in electricity)
  • Strategic geographical position between Central Asia, Russia, Europe and Turkey (crossing point for the distribution of Azeri oil and gas from the Caspian Sea to Turkey)
  • International support, notably from the European Union (EU) and the International Monetary Fund (IMF)
  • Numerous trade agreements, especially with the EU and China
  • Relatively good and improving business environment (obligation for companies to comply with IFRS, adoption in 2020 of laws on bank resolutions and corporate failures that would strengthen the protection of creditors' rights and insolvency and reorganisation procedures)

WEAKNESSES

  • Small open economy sensitive to regional conditions
  • Highly dependent on tourism (26% of GDP including direct and indirect activities, 28% of jobs and 39% of export earnings)
  • Low economic diversification, lack of industrial tradition (8.5% of GDP) and low productivity in agriculture (7% of GDP, 50% of the workforce)
  • Structural trade deficit and low-value exports
  • Highly dollarized banking system (64% of deposits and 57% of loans)
  • High poverty (17% of the population) against a background of unemployment, low levels of education, an informal economy (53% of GDP) and a rural population (42% of the total)
  • Poor governance (corruption, politicised court system)
  • Underdeveloped regional connectivity and transport infrastructure hamper tourism and transit
  • Strained relations with Russia due to the situation in the self-proclaimed independent regions of Abkhazia and South Ossetia (20% of the territory, 210,000 inhabitants)

Risk assessment

A recovery dependent on domestic demand

After growing solidly over the past decade, Georgia experienced its deepest recession since 1992. While it initially stood out with effective handling of the pandemic, the trend reversed in September 2020 as the number of both cases and deaths surged. They started to decline in early December. The strict lockdown from mid-March to mid-May 2020 and restrictions from end-November 2020 to end-January 2021, such as the closure of non-essential shops, fuelled a drop in private consumption (69% of GDP) and services (77% of GDP). This was compounded by a fall in remittances (10% of GDP), which were hit by economic conditions in Russia (60% of remittances), Turkey and Europe. However, remittances began rising in June 2020, benefiting from foreign stimulus plans and becoming a growth driver for private consumption in 2021. They may be supplemented by measures to support vulnerable individuals, including the adoption in July 2020 of a law providing for minimum annual increases and inflation indexing for basic public pensions from January 2021. These drivers will be particularly important given the uncertainty surrounding the recovery of tourism. Despite being slightly mitigated by domestic tourism, tourist numbers fell by 78% year-on-year in January-September 2020. With borders still closed in January 2021, especially with neighbouring countries that account for two-thirds of tourists, the sector will be able to count on the support measures in force since April 2020, such as VAT exemptions, which could be extended in 2021.

Public and private investment (29% of GDP) are expected to lose momentum, hurt by delays to major infrastructure projects, including the huge deep-water port and container terminal in Anaklia on the eastern coast of the Black Sea (USD 2.5 billion, 14% of GDP). The contract for this public-private partnership, which was signed in 2016, was suspended by the government in January 2020 for political reasons. It went to arbitration in July 2020, pushing back the opportunity to boost trade. The goods deficit narrowed in 2020. The decline in re-exports was offset by renewed exports (28% of GDP) of copper ores (14% of the total), alcohol (9%) and gold (3.6%). Imports (49% of GDP) fell by volume via machinery and equipment (22.5% of the total) and by value via the decline in the oil bill (13%), which should continue to support the trade balance in 2021.

Lower oil prices will help contain inflation, which was driven up by food prices and the weak lari. The central bank was able to lower its policy rate (8% in December 2020), and the return of inflation in 2021 to its 3% target leaves the door open for further cuts to support credit to the private sector, which has remained robust thanks to government subsidies and guarantees for lari-denominated loans. Other measures, such as the temporary lowering of capitalisation requirements, alleviated the banking system, whose fundamentals and profitability have strengthened in recent years (2.2% of loans were non-performing in November 2020).

 

Budget variance made possible by international financing

The 2020 stimulus plan (5.5% of GDP) caused the budget deficit to increase sharply. With the recovery, it should move closer to the 3% of GDP rule and resume the path of consolidation. It will be financed by domestic and external borrowing, including USD 831 million (4.6% of GDP) from the Asian Development Bank, the World Bank, the IMF and the EU. These funds may go towards the USD 500 million Eurobond that matures in April 2021, but may also be used to ensure the sustainability of the public debt-to-GDP ratio. Although concessional in nature, the debt surged in 2020 and will remain vulnerable to lari depreciation (78% denominated in foreign currencies) and contingent liabilities of poorly managed state-owned enterprises.

The fall in tourism caused the structural current account deficit to widen. Any reduction in 2021 will be constrained by uncertainty over the recovery in this sector. Multilateral financing took over from FDI, December 2020, 5.1 months of import coverage). This will help contain lari depreciation, while the central bank sold USD 916 million in foreign exchange in 2020. With multilateral financing, the external debt-to-GDP ratio swelled to 104% (excluding FDI-related loans).

 

A less stable domestic political environment

The legislative elections at the end of October 2020 saw victory for the party in power since 2012, the Georgian Dream-Democratic Georgia Party (GD-DG, 48% of the votes), followed by the former majority party, the United National Movement (UNM, 27%). The GD-DG won 60% of seats (compared with three-quarters in 2016), allowing it to form a government on its own. At the end of June 2020 and after agreement was reached with the opposition in March 2020, the electoral law was amended to increase the proportionally elected seats in parliament from 50% to 75%. The opposition organised demonstrations after the elections and protested irregularities such as vote buying. While international observers recognised these issues, they declared the election to be generally free and fair. The GD-DG's third term is expected to see recurring demonstrations by a divided opposition.

 

Last updated: March 2021

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