Trade, Tourism, Inflation Indicators Deteriorate; Remittances Quick to Recover

ISET-PI has updated its real GDP growth rate forecast for Georgia for the second and third quarters of 2020. Here are the highlights of this month’s release:

• Geostat has revised its rapid estimate of real GDP growth for the first quarter of 2020. Estimated growth now stands at 2.2%, which is 0.7 percentage points above the previously estimated average growth rate for Q1.

• The real GDP growth rate contracted by 16.6% and 13.5% year-on-year in April and May 2020, respectively. Consequently, the estimated real GDP for the first five months of 2020 amounted to -5.4%.

• ISET-PI’s forecast for the second quarter of 2020 now stands at 2.7%, up from 2.0% in May. The third quarter growth forecast currently stands at 3.2%. The forecast, which is based on past and current data, does not yet fully account for the negative impacts of the COVID-19 pandemic on the national economy, thus overestimates the reality.

• Based on May’s data, we expect annual growth in 2020 to be 2.8% in the worst-case or “no growth” scenario, and 3.2% in the best-case or “average long-term growth” scenario. Our “middle-of-the road” scenario (based on average growth over the last four quarters) predicts 3.0% real GDP growth in 2020. Once again, these scenarios are based on the current data, and do not fully reflect the expected impact of the COVID-19 pandemic.

• The National Bank of Georgia (INBG) has also released its annual growth forecast for 2020 and this number now stands at -4.0%. The main contributing factors of the GDP contraction are a decline in both external and domestic demand, reduced revenues from exports of goods, remittances and tourism, and weak domestic demand, especially for long-term consumption goods and services.

External Merchandise Trade.

In the face of the harsh measures countries have taken to overcome the COVID-19 pandemic, trade of all commodities, except food and medicine, are projected to decline; depending on the duration of the shock. In May, Georgia’s exports declined by 30.3% y-o-y, driven by reduced exports/re-exports of motor cars, cigarettes and medicines to Azerbaijan, together with declined export of ferro-alleys, and mineral waters to Russia, export/re-export of motor cars, alcohol beverages and mineral waters to Ukraine, and re-export of motor cars to Armenia. There was also a slight decline in the export of merchandise goods to the Euro Union.

During the same period, imports of merchandise goods decreased by 34.5%, driven by petroleum and petroleum products from Russia and Azerbaijan, motor cars from the United States, and reduced imports from China, Turkey, Germany, and Poland. As a result, the trade deficit shrank notably, by 37.8% y-o-y, and amounted to 261.1 million USD.

Money Inflow.

Since all countries will suffer economically in the aftermath of the health and oil price crises, we expect a significant slowdown in remittance inflows from the rest of the world. In May, remittances decreased by 9.6% y-o-y, decreasing people’s disposable income, consumption, and the real GDP growth. The main contributors to this decline were the Russian Federation, Turkey and Israel, while money inflow increased from EU countries. It is notable that remittances recovered relatively quickly, and even increased by 17.8% y-o-y in June.

International Visits and Tourism.

Tourism arrivals and receipts are expected to decline sharply as a result of the numerous travel bans, and due to precautionary behaviors. In May, the number of international visitors decreased by 94.1% y-o-y, while the decline in tourist numbers (visitors who spent 24 hours or more in Georgia) amounted to 93.8%. Georgia has already opened borders unconditionally for Germany, France, Latvia, Lithuania, and Estonia (from July). In summary, decreased money inflow and the dramatically lower number of visitors and tourists in the corresponding month made a significant negative contribution to the growth forecast.

Real Effective Exchange Rate.

In May, the Georgian Lari real exchange rate sharply depreciated in both monthly and yearly terms against all main trading currencies. The most significant real depreciation was observed with respect to the Russian Ruble (3.8% monthly). The Real Effective Exchange Rate (REER) depreciated by 1.1% relative to the previous months and by 6.2% relative to the same month of the previous year (this pattern was also seen in the Nominal Effective Exchange Rate). Notably, in May, the NBG sold 40 million USD foreign currency reserves (from March 13 to July 2, in aggregate, NGB sold 229.650 million USD foreign currency reserves on the NBG's Foreign Exchange Auctions). Overall, REER-related variables had only a small negative contribution to the real GDP growth projections.

Inflation.

According to our model, another negative contributor to growth was the increased consumer price level, compared to the same month of the previous year. In May, annual inflation of consumer prices amounted to 6.5%, which is notably higher than the targeted 3%. About 4.5 percentage points of CPI inflation were due to higher food prices (which increased by 15.1% y-o-y), while tobacco prices contributed 0.4 percentage points with 13.6% annual growth. However, decreased oil prices (by 7.1% y-o-y) had a slight negative contribution (by 0.2 ppts) to the annual inflation measure. The later trend is mostly a reflection of the notably declined oil prices in the global market (the Europe Brent Spot Price [COP] decreased by 58.8% yearly ). The measure of core inflation amounted to 5.4%, which is the highest value since February 2016.

World Prices.

The other variables to have a negative contribution on the growth figure are the Metals Price Index (PMETA), and the Agricultural Raw Materials Index (PRAWM). Metal forms a significant share of Georgia’s exports, while food and oil are one of the main import items. Therefore, a global decrease in the price of metal will likely deteriorate the Georgian economy, whereas a decrease in the price of agricultural products is more likely to be beneficial. In May, metal prices, in annual terms, decreased by 13.5%, while raw agricultural material prices declined by 6.8% in annual terms. Adding the PMETA and PRAWM indicators to the model decreases the growth forecast in both quarters.

Money Supply.

All monetary aggregates, including the largest, Broad Money (M3), and the smallest, Narrow Money (M0), experienced significant yearly growth: 17.1% and 21.4%, respectively. Moreover, currency in circulation increased by 19.8% y-o-y. The Monetary Policy Committee of the NBG met in June and decided to reduce the monetary policy rate by 0.25 percentage points to 8.25% (the reduction of the monetary policy rate was not that significant due to relatively high but stable inflation rates), which is expected to further increase the money supply in the future. Rapid expansion of monetary aggregates has positively contributed to the growth forecast.

Our forecasting model is based on the Leading Economic Indicator (LEI) methodology developed by the New Economic School, Moscow, Russia. We have constructed a dynamic model of the Georgian economy, which assumes that all economic variables, including GDP itself, are driven by a small number of factors that can be extracted from the data well before the GDP growth estimates are published. For each quarter, ISET-PI produces five consecutive monthly forecasts (or “vintages”), which increase in precision as time goes on. Our first forecast (the 1st vintage) is available about five months before the end of the quarter in question. The last forecast (the 5th vintage) is published in the first month of the next quarter.

By Davit Keshelava and Yasya Babych