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Expanding by 4.7% in 2018, Georgia clearly outperformed its
peers; the average expansion rate for the Emerging European region
for 2018 is estimated at 3.2%, which coincides with the global
average.
First, growth was supported by robust household spending, as
credit growth was boosted by long-awaited increase in trust in the
domestic currency, lari, as a result of conscious "larization"
efforts of monetary officials. Second, service export revenue
inflows proved encouragingly robust, mainly due to progress in the
developing tourism industry.
Performance in 2019 is likely to somewhat weaken due to
deteriorated prospects for both external and domestic demand.
Overall economic outlook in key export markets has weakened, with
negative implications for export demand, while waning support for
household spending is expected as regulatory measures are set to
erode domestic credit growth.
Impressive end to 2018
According to the preliminary estimate for Georgian
fourth-quarter GDP growth from the National Statistics Office of
Georgia (GeoStat), the economy ended last year on a strong note,
expanding by 4.5% year-on-year (y/y). Annual growth accelerated,
against an unfavorable base effect.
The strong end brought the annual economic expansion rate for
2018 as whole to 4.7%, marginally below the flash estimate of 4.8%,
which also coincides with the 2017 growth rate. Real growth in the
final quarter of the year was supported by low inflation, as
demonstrated by the moderated increase in the GDP deflator in the
final quarter.
Manufacturing recovers
Manufacturing growth in the fourth quarter returned to positive
territory notwithstanding a decidedly more unfavorable base effect
in the final quarter of the year, while construction contraction
clearly moderated. No service sectors contracted in the fourth
quarter, while the leading domestic trade sector boasted another
impressive quarter. The branches of hotels and restaurants,
transport and communication all expanded by double-digit rates.
The weakness of the manufacturing sector in the second half of
the year compared to the first half forced the industrial sector's
GDP share to drop further in the final quarter, from 17.0% in the
third quarter to 16.5% in the fourth. However, while it was
overtaken by domestic trade as the leading growth contributor,
these two sectors tied as the locomotives of the economy for 2018
as a whole.
Annual data reveal a modest but clear rising trend in the
industrial sector's GDP contribution during 2016-18. The importance
of construction diminished again, while the agricultural sector
continued its decline, on an annual perspective.
We continue to believe that GDP expansion will
decelerate in 2019
The Georgian economy in late 2018 performed somewhat better than
we originally expected, and our current forecast for Georgian GDP
expansion for this year stands at 4.0%. The latest "Rapid Estimate
for Economic Growth from GeoStat supports the outlook for slowing
growth, putting January expansion at 3.5% y/y.
The moderating growth outlook counts on easing demand
from both external and domestic sources
Demand from oil exporter countries Azerbaijan and Russia is
likely to remain muted, given the low oil prices. In addition,
exports to Turkey are subject to major uncertainty at present,
taking into account of Turkey's own persistent economic and
financial fragility.
Moreover, Georgian financial regulations have recently
toughened. This is necessary in order to increase Georgia's
financial resilience, given the persistent problem of
dollarization. However, the immediate impact from increased
regulation is likely is to suppress domestic credit growth, with
expected negative implications for household spending and overall
economic activity.
Moreover, real growth is likely to slow down also because the
trend of easing GDP deflator growth seen since late 2017 is likely
to halt now. Notably, we expect that some delayed impact from the
recent depreciation of the lari will still push inflation at least
temporarily above the target (currently set at 3.0%). Meanwhile,
the assistance from the recent lari weakening against the USD on
export competitiveness is restricted by depreciation of the Russian
ruble.
In the medium term, we expect the performance in the
construction sector to strengthen again, with investment prospects
in the hydropower sector particularly lucrative, while also the
technology and communication service fields are likely to attract
substantial amounts of FDI inflows. Meanwhile, additional
infrastructure investments are needed in order to further support
the promising tourism industry.