Georgian Economy Keeps Strong While Eurozone Crisis Bites
08 November, 2012

Notwithstanding the global economic instability and the Eurozone crisis, Georgia’s economic activity that accelerated in the first half of 2012, remains strong.

Growth in the transition region is expected to drop from 4.6 per cent in 2011 to 2.7 per cent in 2012 before modestly picking up to 3.2 per cent in 2013, as the Eurozone crisis continues to negatively affect economic performance -  the latest Regional Economic Prospects, a quarterly economic outlook of the European Bank for Reconstruction and Development

(EBRD), reports.

The transition region as a whole performed substantially worse in the first half of this year than in the second half of last year as the effect of the Eurozone crisis spread further east.

Central Europe and the Baltics (CEB) and South-eastern Europe (SEE) were first hit by the turmoil as they are the most integrated with the single currency area. Even though their growth rates recovered slightly in the second quarter of this year, they remained low and forward looking indicators suggest they may have fallen again in the third quarter.

Turkey has continued its rapid slowdown following a capital inflow-funded credit boom in 2010-11. While Eastern Europe and Caucasus (EEC) recorded increasing growth rates since late last year, importantly for the region as a whole, Russian growth has been slowing down. Should this trend continue, it will negatively affect growth in the EEC and Central Asia and especially in the non-commodity exporting countries, the EBRD predicts.

The global economic instability and the eurozone crisis have had an impact on this diverse region. Ukraine has been affected by lower external demand and tight financial conditions, compensated to some extent by domestic consumption. The economy of Belarus has been recovering from last year’s balance of payments crisis as domestic producers benefited from real exchange rate devaluation. Azerbaijan’s non-oil sector has expanded, but only partly compensating for the on-going oil sector contraction.

Georgia’s broad-based recovery has continued at a fast pace. Moldova has been slowing down recently as external demand and remittances inflows have decelerated. Armenia has demonstrated some resilience so far, in part due to its lower integration in the European market. The region’s vulnerabilities remain significant due to the reliance on external demand (in particular from the EU and Russia) to support growth, terms of trade pressures (as all countries except for Azerbaijan are net energy importers, and the Caucasus countries depend on import of foodstuffs), and volatility of remittances (Armenia, Georgia and Moldova). Risks to the outlook are related to developments in external demand, commodity prices, and stability of the domestic and, in some cases, broader European financial sectors, as well as domestic policy slippages, which may in some cases threaten needed international support and re-ignite balance-of-payments pressures.

Georgia’s economic activity accelerated in the first half of 2012 and remains strong. As the external financing package mobilised by a range of donors during the twin crisis of 2008 has largely been exhausted, the authorities have pursued private sources of financing including with support of a public fund responsible for supporting private investment in key sectors. Uncertainty about the external environment has been mitigated by a precautionary arrangement with the IMF.

Exports from all CEB and SEE and some SEMED countries were lower in July of this year relative to September of last year whilst exports from many Eastern Europe and Caucasus and Central Asian countries grew as many of them are destined for Russia, whose economy started slowing down with a lag relative to that of the Eurozone.

Overall private capital outflows from the region in the second half of 2011 have since turned into mild inflows, mainly due to developments in Russia and Turkey. In the second half of 2011, flows into the CEB and SEE regions as well as Turkey fell substantially and non-FDI outflows from Russia intensified, partly as the Eurozone turmoil increased investors’ risk aversion. More recently, inflows into Turkey increased somewhat and outflows from Russia moderated, returning positive private capital flows to the region as a whole.

With less external funding available, real credit continues to contract in almost all CEB and SEE countries. Within the CEB region, only Poland recorded mildly positive year-on-year real credit growth in August of this year.

High non-performing loan (NPL) ratios, which persist as a legacy of the 2008/09 crisis in many countries, have also contributed to low credit growth. In 2011 and the first half of 2012, there were further NPL increases in the SEE region where the average ratio is now above 15 per cent (compared to 4 per cent in 2008).

Unemployment has remained above pre-2008-09 crisis levels in most CEB countries as employment has generally failed to keep pace with GDP growth since 2010. In the SEE region there have been some apparent declines in unemployment (although from very high levels). In the SEMED region the political and economic turmoil in the first half of 2011 contributed to the rising unemployment.