Georgian GDP expansion to enhance the last year’s decline
23 September, 2010
Georgian GDP expansion to enhance the last year’s decline


Georgian economy will grow this year, the research of BG Capital, one of the leading Georgian investment banks, reported on September 16, 2010.

The research makes a detailed analysis of Georgian economy and assures that the 3.9% contraction of Georgian GDP last year [one of the tiniest among the non-energy exporting countries of Eastern Europe] will be replaced by approximately 4.9% of growth by the end of this year that will fully offset the past year’s slump. Georgian economy has

improved in the first quarter of this year and real GDP grew by 4.5% that creates a ground for the above presumption. BG Capital analysts believe that the long-term annual real GDP growth rate will reach 5% supported by heavy investments into infrastructure and service sector.
The country traditionally relies on Foreign Direct Investments (FDIs) and debt capital inflows to offset its inherent current account deficit. The deficit halved   in 2009 and accounted for 11.7% of GDP on the back of weaker domestic demand and depreciation of Georgian national currency Lari.

According to BG Capital prognosis, this year’s upbeat recovery in export will squeeze it further to 10.8%.The capital and financial account’s projected surplus will likely fall short of current account deficit by USD 230 million [the similar balance was by USD 25 million more past year] as FDIs inflow remains weak and banks pay down external debt.

Georgia’s external financing gap should be fully eliminated next year as global capital markets improve whereas this year’s financing shortfall will be safely covered by IFC funds.
The Report predicts negligible foreign exchange shock-related risks next year. The Lari is down by 23% versus US dollar since August of 2008 when the country was affected by the short-lived war. And the current Lari vs. US Dollar exchange rate looks to be an adequate reflection on the country’s external financing balance. BG Capital does not expect any foreign exchange rate shocks and see the Lari only slipping marginally to GEL 1.9 against USD 1 by end of 2010 on the back of seasonal pick-up in import. The national currency rate should then move back towards the currently fixed GEL 1.85 vs. USD 1 by end of 2011as foreign capital inflows intensify.
The budget deficit’s hike to 9.2% of GDP in 2009 spurred the government to tighten its fiscal belt and target a gap at below 5% in 2011.Current progress on fiscal consolidation is encouraging and the government already improved its 2010 deficit target to 6.3% from the initial 7.1% on higher-than-anticipated tax revenues.

Central government debt stood at a comfortable 35% of GDP as of end of the first half of the year of 2010; however the figure is poised to peak at near 38% of GDP by the end of the year before reversing in the coming years as BG Capital analysts predict.
Lending grows on better funding and the loan quality is improved. Although still underpenetrated, the banking sector goes ahead to strengthen with customer deposits hovering at all-time high, the Report assures. Meantime the Non-Paid-Loans (NPL) have come down to below 16% from a 19% peak in mid-2009.The largest banks remain well-capitalized,  with the bulk of delinquent loans already sufficiently provisioned. The banking sector’s improved health helped unlock lending which grew by 5% by end-July of 2010 [without influence of the foreign exchange rate]. The BG Capital report approved the recent inflation-targeting rate hikes proposed by National Bank of Georgia (NBG) and will not impede recovery in lending. BG Capital analysts presume that the aggregate loan book will expand by 13% [by 23% in Lari] in 2010 on a foreign-exchange rate adjusted basis. And the growth rate will be maintained next year.

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