ECONOMIC OUTLOOK September, 2017 MINISTRY OF ECONOMY AND SUSTAINABLE DEVELOPMENT
CONTENTS GDP growth... 3 Potential Level of Economic Growth and GDP Gap... 3 Macroeconomic Environment in the Region... 3 Main Growth Drivers... 4 Inflation... 4 Business Sector... 5 External Trade... 5 Tourism... 7 Foreign Direct Investments... 7 Remittances... 7 Current Account Balance... 8 Sovereign Credit Ratings... 8 Unemployment... 8 Sovereign Debt... 9 Government Securities ket... 9 Monetary Policy Rate... 9
GDP GROWTH Georgian economy was exposed to severe external economic shocks. Negative development in the region and global economic slowdown negatively affected economic growth of Georgia. Consequently, in 2016 according to the preliminary estimate GDP growth rate equaled to 2.7%. The main contributors of GDP growth were: construction sector (0.6pp), manufacturing sector (0.4pp) and real estate (0.4pp). In July, 2017 real GDP growth rate amounted to 3.8%, contributed by construction sector (1.1pp), Hotels and restaurants (0.4 pp) and trade (0.3pp). In the 1 st quarter of 2017 real GDP growth amounted to 5.1%, in 2 nd quarter of 2017 GDP growth rate equaled to 4.0%. Average annual growth of uary-july amounted to 4.4%. According to Government of Georgia s forecast real GDP growth will be 4% in 2017. Economic growth 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 4.4% 2.9% 2.7% June July Aug Sep Oct Nov Dec June July Aug Sep Oct Nov Dec June July 2015 2016 2017 Monthly economic growth annual growth POTENTIAL LEVEL OF ECONOMIC GROWTH AND GDP GAP From the beginning of 2017 real GDP growth rate converged to its potential level and the GDP gap in the first quarter amounted to -0.5% and in the second quarter -1.1%.. Starting from the 4 th quarter of 2014 Economic growth rate falls below its potential level and in 2016 GDP gap equaled to 2.1%. The main contributors of the GDP gap are weak external demand and reduced disposable income, due to the increasing debt service as a result of dollar appreciation. MACROECONOMIC ENVIRONMENT IN THE REGION According to IMF s latest estimates, Georgia s real GDP growth projection in 2017 is 3.5%. 1 3.5% 3.5% 3.5% 2.5% 2017 GDP Growth Forecast 2.9% 2.7% 2.0% 2.0% 1.4% 1.3% -0.5% -0.4% -1.0% -1.4% Georgia Turkey Armenia Ukraine Russia Azerbaijan Belarus IMF Worldbank 1 Growth projections are based on IMF s latest press releases 3
MAIN GROWTH DRIVERS During the last years the main growth driver is investments. Private investment accounts significant share of total investment and it contributed to GDP growth by 2.6 pp in 2016. 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Public and Private investments 0.0% 2010 2011 2012 2013 2014 2015 2016 Public investments (% GDP) Private investments (% GDP) economic growth In the 1 st quarter, 2017 contribution of consumption in GDP growth amounted to 3.5 percentage point. In line with increasing foreign demand contribution of real net export amounted to 1.8 pp. 10.0% Decomposition of GDP Growth 6.0% 2.0% 3.2% 2.5% 2.9% 3.0% 2.9% 3.3% 2.8% 2.2% 2.8% 2.7% 5.1% -2.0% -6.0% -10.0% 2015 I 2015 II 2015 III 2015 IV 2015 2016 I 2016 II 2016 III 2016 IV 2016 2017 I Real consumption Real investments Real export of goods and services Economic growth INFLATION For 2017 inflation target is 4% by National Bank of Georgia. In 2016 annual average inflation rate amounted to 2.2%. In 2016 inflation was characterized by declining tendency. In December annual inflation amounted to 1.8%. Weak aggregate demand, decreasing inflation expectations and transmission of earlier drops in international oil and food prices kept inflation rate below the target. Average core inflation 2 rate is higher, but it also shows declining trend. In the beginning of the year core inflation rate was about 7% and in November amounted to 0.9% and in December 1.8%. Average annual core inflation rate equaled to 3.6%. In ruary-august of 2017 annual inflation rate was above the target (4%). In August, 2017 inflation rate amounted to 5.7%. Increase in annual inflation rate was contributed by import inflation and increase in intermediate costs. In uary-august average annual inflation amounted to 5.8%, while core inflation was lower and equaled to 3.6%. 2 excl. regulated tariffs, energy and food prices 4
BUSINESS SECTOR Economic growth in the country is private sector driven and this tendency continued in 2017 as well. In the 2 nd quarter, 2017 turnover of business sector has increased by 16.9% year on year. In the same period, output of business sector has increased by 18.9%. In the 2 nd quarter, 2017 number of employees in business sector increased by 5% and amounted to 631.3 thousand. In uary-july of 2017 turnover of business sector has increased by 17.9%, while growth rated of production equaled to 17.6%. Business Sector, 2016 15.0% 13.0% 6.0% Employment, IV Output, I-IV Turnover, I-IV EXTERNAL TRADE Decreasing trend of export that started in 2014, from the 3 rd quarter of 2015 was mainly driven by price effect and decline of real export has gradually slowed down. Moreover, decline in nominal terms has also slowed down and from September of 2016, export shows growing tendency. Export in real terms has significantly increased from June 2016 and in overall in 2016 real growth amounted to 10.1%. In July 2017 export has significantly increased and growth rate amounted to 22%. Real growth amounted to 15.1 pp, while price effect was 7.3 pp. In July import increased by 6.0% that was mainly driven by increase of import of consumption goods (6.1pp). Import of investment goods decreased (-4.0pp), which was mainly caused by base effect and import intermediate goods increased (3.9pp). -27% -1% -13% -10% -7% -13% -2% -19% -14% -9% Change of Export 18% 23% 10% 0% 0% -11% -13% -18% -15% -14% 6% 7% 25% 23% 3% 34% 7% 15% 2015 I 2015 II 2015 III 2015 IV 2015 2016 I 2016 II 2016 III 2016 IV 2016 2017 I 2017 II Jun-17 July real price export change In uary-july export has increased by 28.9% (USD 324.8 million) and amounted to USD 1,446.7 million, import has increased by 8.5% (USD 329.8 million) and amounted to USD 4,228.6 million. 5
-8,000-6,000-4,000-2,000 0 2,0 00 4,0 00 6,0 00 8,0 00 10, 000 12, 000 External trade, 2010-2017 4,504 4,265 4,820 3,694 2,722 4,105 3,899 4,229 884 1,185 1,352 1,475 1,666 1,268 1,122 1,447 (1,838) (2,509) (3,152) (2,790) (3,154) (2,837) (2,777) (2,782) 2010 I-VII 2011 I-VII 2012 I-VII 2013 I-VII 2014 I-VII 2015 I-VII 2016 I-VII 2017* I-VII Export Import Balance Turnover From the 2 nd quarter of 2015 import started to adjust to exchange rate depreciation. Since il 2016, however, growth of import of investment goods, mainly driven by growth of machinery import (including: generators, medical machines, data processing machines, industrial machines and etc.), largely outweighed the declining trend. From October growth of total import was mainly contributed by increase in import of intermediate goods (including: parts and accessories of machinery and fuels and lubricants). Contribution of Commodity Categories in Import Change Investment intermediate consumption In 2016 export has decreased by 4.1% YOY and amounted to USD 2,113 million. Import has decreased by 0.1% (USD 7,287 million). 2016-5,175 External Trade, 2010-2016 2,113 7,287 2015-5,088 2,205 7292 2014-5,741 2,861 8,602 2013-5,112 2,911 8,023 2012-5,680 2,377 8,056 2011-4,886 2,186 7,072 2010-3,559 1,677 5,236-8,000-6,000-4,000-2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 Export Import Balance 6
TOURISM In 2016 International Tourism revenues has increased by 12% YOY and generated more foreign exchange income by USD 230 million. In July, 2017 International Tourism revenues amounted to USD 374.7 million, 35.7% higher to the same period of 2016. In uary-july international tourism revenues increased by 28.5% (USD 325.9 mln.) and amounted to USD 1,468.6 million. 2,400.0 2,000.0 1,600.0 43.6% 50.4% 1,410.9 International Tourism Receipts (mln USD) 1,709.9 1,786.3 1,935.8 2,165.9 60.0% 40.0% 1,200.0 938.3 21.2% 800.0 400.0 4.5% 8.4% 11.9% 20.0% 0.0 2011 2012 2013 2014 2015 2016 International Tourism Receipts change % 0.0% FOREIGN DIRECT INVESTMENTS The last three years was a period of recovery in foreign direct investments and FDI/GDP ratio remains stable. In 2016 foreign direct investments amounted to USD 1.565.9 billion. In the 1 st quarter of 2017 foreign direct investment increased by 3.4% and amounted to USD 403.3 million. Foreign direct investments in real terms shows even more substantial increase. Due to the strong dollar, calculation in dollar does not fully reflect real growth rates. For more precise picture of real growth rates data on foreign direct investments was adjusted by US dollar index. Foreign Direct Investments 1,758 1,799 1,802 1,564 1,566 1,886 814 814 1,117 1,066 912 894 942 934 2010 2011 2012 2013 2014 2015 2016* FDI (mln USD) Dollar index adjusted FDI In 2017 the largest share of FDI 35% fell on transports and communications sector (USD 141 million), followed real estate 20% (USD 80.3 million), financial sector 20% (USD 79.6 million) and construction 14% (USD 56 million). Top investor countries were: Azerbaijan 24.1% of total FDI, following Turkey 20.3% and United Kingdom 19.9%. REMITTANCES Since the second half of 2016 volume of remittances has considerably increased. Overall growth rate in 2016 amounted to 6.6%. In uary-ch, 2017 remittances has increased by 20.3%. 7
30% 20% Ramitances Annual Growth, % 10% 0% -10% -20% Jun Jul Aug Sept Oct Nov Dec Jun Jul Aug Sept Oct Nov Dec Jun Jul Aug Sept Oct Nov Dec Jun Jul 2014 2015 2016 2017-30% -40% CURRENT ACCOUNT BALANCE High level of current account deficit represents one of the main sources of external vulnerability. In the 1 st quarter of 2017 current account deficit has improved and amounted to 11.8% of GDP. Improvement of CA deficit was contributed by increase of net service export. In the 1 st quarter, 2017 increase of national savings was the main driver of CA deficit improvement. In this period, national savings amounted to 14.8% of GDP, represented 2.8pp increase, compared to the previous year. CA deficit is mostly financed by FDI. In the 1 st quarter of 2017 93% of CA deficit was financed by FDI. 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 10.5% 10.3% 6.3% 5.8% 12.8% 6.2% Current account deficit 11.7% 3.9% 5.8% 5.1% 10.6% 8.1% 12.0% 9.1% 13.3% 10.0% 11.8% 11.0% 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 I Current accound deficit (% GDP) FDI (%) Non FDI financed (%) SOVEREIGN CREDIT RATINGS Georgia is continuing collaboration with Sovereign Credit Rating Agencies: Standard & Poor s, Fitch and Moody s. Our country maintains stable credit rating performance. Standard & Poor s and Fitch rate Georgia at BB- and Moody s at Ba3 with a stable outlook. Credit ratings of other countries in the region have been downgraded. S&P and Fitch downgraded Azerbaijan s sovereign credit rating from BBB- to BB+ and Moody's downgraded from Baa3 to Ba1. Moody's downgraded Armenia s credit rating from Ba3 to B1. S&P and Moody's downgraded Russia s credit rating. Compared to December 2014 Moody's downgraded Russia s credit rating from Baa3 to Ba1, while S&P downgraded from BBB- to BB+. In September 2016 Moody's downgraded Turkey s credit rating from Baa3 to Ba1, which followed S&P downgrade in July from BB+ to BB. According to Moody s latest evaluation of Georgia s credit rating major weaknesses are: high level of external vulnerability (included foreign currency denominated debt) and geopolitical risks in the region. Major rating strengths are: high average growth rates, strong and improving institutions and a relatively moderate debt burden. According to Moody s, ongoing structural reforms and Free Trade Agreements will stimulate growth in the medium term. UNEMPLOYMENT In 2016, the annual unemployment rate reached its lowest point in 13 years and amounted to 11.8%, a decline of 0.2 percentage points compared to 2015. 8
SOVEREIGN DEBT Government debt is at safe level of 44.6% to GDP, out of which external debt is 35.2%and domestic debt 9.3% In accordance with development of capital market, growth of government securities emission is expected and as a result, share of domestic debt will rise and necessity of foreign borrowing will decrease. GOVERNMENT SECURITIES MARKET In uary-august of 2017 Government securities emission amounted to 1,170 million GEL. In 2016 Government securities emission volume was 1,159 mln GEL, while demand was considerably higher and amounted to 2,749 mln GEL. For the development of government securities market participation of foreign investors is quite important, as it supports expansion of the market and competitiveness growth. According to the data of July 2017, share of nonresident investors in holding of government securities amounts to 6.1%. 16% Interest Rates on Tressury Bills and Five Years Tressury Bonds 12% 8% 4% 0% I/2015 II/2015 III/2015 IV/2015 V/2015 VI/2015 VII/2015 VIII/2015 IX 2015 X 2015 XI 2016 I/2016 II/2016 III/2016 IV/2016 V/2016 VI/2016 VII/2016 VIII/2016 IX 2016 X 2016 XI 2016 I/2017 II/2017 III/2017 IV/2017 V/2017 VI/2017 VII/2017 average weighted interest rates on tressury bills (%) average weighted interest rates on five years tressury bonds (%) VIII/2017 Declining trend on interest rates of treasury securities indicates the recovery of long-run confidence in the economy. MONETARY POLICY RATE In July of 2017 Monetary Policy Committee decided to keep the refinancing rate unchanged at 7%. The decision is based on the macroeconomic forecast, according to which inflation is expected to be above its target rate for the most of the 2017. Nonetheless inflation is going to decline in 2018 and remain below the target. Since il, 2016 to the end of the year National Bank of Georgia implemented accommodative monetary policy. 10.0 Monetary Policy Rate and Inflation 8.0 6.0 4.0 2.0 0.0-2.0 12/02/2014 12/03/2014 12/04/2014 12/05/2014 12/06/2014 12/07/2014 12/08/2014 12/09/2014 12/10/2014 12/11/2014 12/12/2014 12/01/2015 12/02/2015 12/03/2015 12/04/2015 12/05/2015 12/06/2015 12/07/2015 12/08/2015 12/09/2015 12/10/2015 12/11/2015 12/12/2015 12/01/2016 12/02/2016 12/03/2016 12/04/2016 12/05/2016 12/06/2016 12/07/2016 12/08/2016 12/09/2016 12/10/2016 12/11/2016 12/12/2016 12/01/2017 12/02/2017 12/03/2017 12/04/2017 12/05/2017 12/06/2017 12/07/2017 12/08/2017 Monetary policy rate Annual inflation 9
MINISTRY OF ECONOMY AND SUSTAINABLE DEVELOPMENT ADDRESS: 10a Chovelidze Str., Tbilisi, 0108, Georgia TEL: +(995 32) 2 99 11 14 FAX: +(995 32) 292 15 34 E-MAIL: vtsintsadze@economy.ge