Galt & Taggart looks back on the Georgian economy in 2021

The Georgian economy recorded one of the strongest recoveries in the region last year, registering growth in almost all key sectors, currency stabilization, and healthy gains in the banking sector. G&T’s end of year report examines macroeconomic indicators from 2021 and provides positive predictions for the year ahead.

Positive growth outlook

Georgia’s real GDP growth in 2021 exceeded most economists’ expectations and is projected to reach 10.5%, according to G&T’s latest macroeconomic review. Most of the country’s key sectors, including manufacturing, trade, transportation, real estate, and hospitality showed growth in 2021, fueled in part by strong exports and remittances as well as fiscal stimulus and strong bank lending. With unemployment at 19.5% in Q3 of 2021, its lowest figure since Q4 of 2020, analysts are predicting it will return to its pre-pandemic level of 17-18% this year.

Considering these positive developments, G&T predicts that economic growth in 2022 will amount to 5%, a figure slightly lower than the IMF and government forecasts of 5.8% and 6.0%, respectively. However, higher tourism recovery could positively affect this projection, while disruptions caused by the pandemic and geopolitical tension in the region risk stifling growth.

Strong exports

Georgia’s exports ended the year strongly in December, increasing 28.8% YoY and 5.9% compared to 2019, statistics that can largely be attributed to the growth of trade partners’ economies and high commodity prices worldwide. Imports also boasted YoY growth of 26.3%, up 6.7% compared to 2019.

Tighter monetary policy

The National Bank of Georgia continued to tighten its monetary policy throughout 2021, raising the benchmark interest rate by half a percentage point in December (to 10.5%) in an effort to temper inflation expectations in the medium term. Overall inflation for 2021 amounted to 9.6%, with the NBG attributing Georgia’s inflationary woes to transitory and exogenous factors, including global commodity prices, higher utility tariffs, and the acceleration of local demand.

Looking to 2022, G&T analysts evaluated other factors that could potentially affect inflation, including possible GEL depreciation, continued growth in energy prices, and wage growth. Upon analysis, these risks have been deemed weaker than in earlier forecasts, leading G&T to predict an average inflation rate of 4.1% in 2022, which is notably lower than the NBG’s current forecast of 7.2%.

The lari stabilizes

Since May, the GEL/USD rate has remained relatively stable, trading consistently in the 3.1 – 3.2 GEL/USD range for the second half of 2021. G&T attributes this stability to several factors, including tighter monetary policy, strong growth, recovery in the tourism sector, and foreign exchange interventions in the run-up to the October elections.

Unlike in previous instances, the depreciation of the Turkish lira in recent months has not negatively affected the value of the lari. At this time, G&T expects that any impact the lira’s instability might have on the value of the lari through trade channels would be both small and short-lived, citing stable regional currencies, high GEL rates, and continued recovery in external earnings as neutralizing factors.

In 2022, G&T expects the value of the lari will appreciate compared to its 2021 level, hovering in the range of 3.0 – 3.15 GEL/USD. However, domestic and regional instability as well as pandemic-related disruptions could negatively affect this forecast.

The banking sector sees healthy growth

The banking sector’s loan portfolio continued to grow in 2021, registering a 16.4% YoY increase (excluding the FX effect) in November. The NBG’s Financial Stability Committee introduced two new regulations for foreign currency lending in December that came into effect on January 1, 2022. These regulations, which affect the method through which banks’ currency induced credit risk is calculated and limit the term of FX loans to a maximum of ten years (down from 15), are expected to make FX loans more expensive, depending on the level of dollarization in banks’ portfolios. However, G&T does not foresee the new regulations having a major impact on the banking sector’s loan dollarization structure in the short or medium-term, given the existing regulations already imposed on FX loans.

These stricter lending regulations combined with tightened monetary policy will soften lending growth to 11%-13% in the coming year, according to G&T’s forecasts for 2022.