Forecast of GDP, trade balance and inflation rate in Georgia 2021

ISET-PI has updated its growth forecast Georgia's GDP, trade balance and inflation forecast for the fourth quarter of 2020 and the first quarter of 2021. Here are the highlights of this month's release:

Main forecast for GDP growth, trade balance and inflation rate in Georgia:

The real GDP growth rate in October 2020 was -3.9% year on year. Consequently, the estimated real GDP for the first ten months of 2020 was -5.1%.
GeoStat recently released its preliminary estimate of real GDP growth for the first and second quarters of 2020. Growth rates for the 1st and 2nd quarters were revised downward to 2.2% (by 0.1 percentage points) and -13.2% (by 0.9 percentage points), respectively.
As a result of the update, the growth forecast for the 4th quarter of 2020 was unchanged at -3.3%. The second ISET-PI forecast for the 1st quarter of 2021 assumes GDP growth of -1.6%.
Based on October data, we expect annual growth in 2020 to be -4.6%, down 0.2 percentage points from the previous forecast.

According to a recent forecast ISET-PI, Georgia's GDP growth in the first quarter of 2021 decreased from -1.4% to -1.6%. This correction is mainly explained by GeoStat's downward revision of growth rates for the 1st and 2nd quarter (by 0.1 and 0.9 percentage points, respectively).

Otherwise, in terms of October data, several variables have changed significantly, affecting growth forecasts.

Bank deposits in national and foreign currencies in Georgia

The first set of variables that have a moderate impact on our forecast relates to bank deposits in Georgian domestic and foreign currencies in commercial banks. All categories of deposits in national currency (except for currency in circulation) showed year-on-year growth in October.

In particular, demand deposits in national currency increased by 3.5% per year, and time deposits increased by 73.6% per year. Consequently, the total volume of deposits in national currency increased by 27.1% per year.

During the same period, time deposits decreased by 0.6% on a monthly basis, while demand deposits and cash in circulation decreased by 4.2% and 9.2%, respectively, compared to the previous month.

В отличие от депозитов в национальной валюте, общий объем депозитов в иностранной валюте увеличился относительно умеренно – на 19,4% по сравнению с тем же месяцем предыдущего года. За тот же период почти все категории валютных депозитов увеличивались более чем на 10% ежегодно. Ежегодный рост депозитов в иностранной валюте в основном обусловлен резким обесцениванием национальной валюты.

However, the growth rate remains noticeable even after excluding the exchange rate effect. As a result, deposit dollarization increased by 0.6 percentage points per month and decreased by 1.7 percentage points per year. Despite the positive annual trends, deposit-related variables still had a small negative contribution to real GDP growth according to our model.

Forecast of VAT turnover in Georgia in 2021

In terms of other variables of interest, VAT turnover in October decreased by 3.8% per annum and increased by 13.8% per month. Therefore, this variable had a negative contribution to real GDP growth.

Реальный эффективный обменный курс грузинский лари – доллар США

In October, the real effective exchange rate (REER) appreciated slightly by 0.8% m/m and remained largely stable year-on-year. Notably, the real exchange rate of the lari depreciated against the euro and dollar by 0.6% and 0.7%, respectively, on a monthly basis, and by 10% and 5.5%, respectively, on an annual basis.

In contrast, the REER increased relative to its two main trading partners: Turkey (by 2.4% per month and 17.1% per year) and Russia (by 1.4% per month and 11% per year). A decrease in REER is usually associated with an increase in the competitiveness of domestic export goods in foreign markets, but it also leads to higher prices for imported goods.

Overall, REER-related variables had a small negative contribution to forecasts of real GDP growth.

Georgian foreign trade indicators in 2021

In October 2020, Georgia's exports decreased by 2.2% year-on-year, which was mainly caused by a decrease in exports/re-exports of cars and trucks, as well as alcoholic beverages to Armenia; passenger cars, tobacco and carbon steel rods to Azerbaijan; cars, medicines, natural grape wines and mineral waters to the Kyrgyz Republic; and ferroalloys and frozen lamb/goat meat to Iran.

At the same time, Georgian exports to China (due to increased exports/re-exports of precious metals and copper ores and concentrates) and Saudi Arabia (due to increased exports of live animals) increased significantly.

At the end of 2020, imports of goods in Georgia decreased by 23.5%, which was caused by a reduction in imports of oil and fuel products from Russia (mainly due to a significant annual decline in crude oil prices on the international market). Other imports affected include: passenger vehicles from the US; copper ores and concentrates from Brazil; petroleum coke bitumen and paving slabs from Iran; and cars from Germany.

On the contrary, Georgian imports of precious metals and concentrates from Armenia; The production of oil and copper ores and concentrates from Azerbaijan increased annually. Consequently, the trade deficit fell sharply by 34.8% per year to $393.5 million. Overall, trade-related variables contributed positively to the GDP growth forecast.

Analysis of the inflow of remittances to Georgia in 2021

After a significant slowdown in remittance inflows at the beginning of the year, remittance inflows began to pick up in June. In October, remittances rose 18.6% year on year to $181.7 million.

The main sources of this increase were Ukraine (by 151.9% y/y, contribution 4.3 p.p.), Italy (by 30.9% y/y, 4.2 p.p.), USA (by 39 .5% y/y, 3.9 p.p.), Greece (23.6% y/y, 2.5 p.p.), Germany (by 74.6% y/y, 2.2 p.p. .p.), Azerbaijan (by 145.1% y/y, 2.1 p.p.) and Turkey (by 26% y/y, 1.4 p.p.).

At the same time, cash inflows decreased from the Kyrgyz Republic (by 83.1% y/y, -1.7 p.p.), Russia (by 7% y/y, -1.7 p.p.) and Kazakhstan (by 44% y/y, -0.9 p.p.). The recovery in remittance flows made a significant positive contribution to the growth outlook.

International visits and tourism in Georgia in 2021

Profits and receipts from tourists have declined sharply as a result of numerous travel bans, as well as precautions taken by potential tourists. So what will be the forecast for international visits and tourism in Georgia in 2021?

In October, the number of foreign tourists decreased by 92.5% per year (due to Russia [-17.1 p.p.], Azerbaijan [-17.4 p.p.], Armenia [-16.8 p.p. ] and Turkey [-10.2 p.p.]), while the decline in the number of tourists (visitors who spent 24 hours or more in Georgia) amounted to 88%. Overall, the sharp decline in the number of visitors and tourists, along with the sharp decline in tourism spending, made a significant negative contribution to the growth forecast.

Inflation in Georgia in 2020

Georgia's 2020 consumer price inflation stood at 3.8% in October, slightly above the projected 3%. It is noteworthy that inflation approached the target value at the end of 2020. About 1.5 percentage points of CPI inflation were associated with higher food prices (5.4% annual increase), while tobacco prices contributed 0.4 percentage points (13.5% annual increase). However, the decline in oil prices (16.7% per annum) made a noticeable negative contribution (0.6 percentage points) to the annual inflation rate.

The latter trend is mainly a reflection of the significant weakening of oil prices on the global market (the spot price of Brent crude oil in Europe (COP) fell by 32.7% annually). Overall, CPI-related variables contributed positively to the GDP forecast.

Our forecasting model is based on the Leading Economic Indicators (LEI) methodology. We have built a dynamic model of the Georgian economy, which assumes that all economic variables, including GDP itself, are determined by a small number of factors that can be extracted from the data long before GDP growth estimates are published.