ISET GDP Forecasts | Improved trade balance and inflation rate in Georgia


ISET-PI has updated its real GDP growth forecast for the fourth quarter of 2020 and the first quarter of 2021. Here are the highlights from this month’s publication:


• The real GDP growth rate stood at -3.9% year-on-year for October 2020. Therefore, the estimated real GDP for the first ten months of 2020 was -5.1%.

• Recently, GeoStat released its preliminary estimate of real GDP growth for the first and second quarters of 2020. The growth rates for Q1 and Q2 have been revised down to 2.2% (from 0.1 ppt) and -13.2% (by 0.9 ppt) respectively.

• Following the update, the growth forecast for the fourth quarter of 2020 remained unchanged at -3.3%. ISET-PI’s second forecast for the first quarter of 2021 places GDP growth at -1.6%.

• Based on October data, we forecast annual growth of -4.6% in 2020, 0.2 percentage point lower than the previous forecast.

According to recent forecasts from ISET-PI, GDP growth in the first quarter of 2021 fell from -1.4% to -1.6%. This correction is mainly explained by the downward revision by GeoStat of the growth rates for Q1 and Q2 (respectively by 0.1 and 0.9 percentage point). Otherwise, from an October data perspective, several variables have changed significantly, which affected the growth forecast.

Deposits in national and foreign currencies.

The first set of variables that have a moderate effect on our forecast concerns domestic and foreign currency deposits in commercial banks. All categories of domestic currency deposits (except currency in circulation) grew in annual terms, while they declined month over month in October. In particular, sight deposits in national currency experienced an annual increase of 3.5%, while term deposits grew by 73.6% per year. As a result, total deposits in national currency increased by 27.1% per year. During the same period, term deposits decreased by 0.6% in monthly terms, while demand deposits and currency in circulation decreased by 4.2% and 9.2% respectively on the month previous.

Unlike domestic currency deposits, total foreign currency deposits increased relatively moderately by 19.4% compared to the same month of the previous year. During the same period, almost all categories of foreign currency deposits increased by more than 10% per year. The annual growth of foreign currency deposits is mainly driven by the sharp depreciation of the national currency. Nevertheless, growth rates remain pronounced even after excluding the exchange rate effect. As a result, the dollarization of deposits grew by 0.6 percentage points per month and decreased by 1.7 percentage points per year. Despite the positive annual trends, the deposit variables still had a slightly negative contribution to real GDP growth according to our model.

VAT turnover.

Regarding other variables of interest, VAT turnover in October decreased by 3.8% per year and increased by 13.8% per month. Therefore, this variable had a negative contribution to real GDP growth.

Real effective exchange rate.

In October, the real effective exchange rate (REER) appreciated slightly by 0.8% monthly and remained broadly stable in annual terms. Notably, the real exchange rate of the lari depreciated against the euro and the dollar by 0.6% and 0.7% respectively in monthly terms and by 10% and 5.5% respectively in annual terms. On the other hand, the REER appreciated vis-à-vis the two main trading partners: Turkey (by 2.4% per month and 17.1% per year) and Russia (by 1.4% per month and 11% per year). The depreciation of the REER is generally associated with the fact that domestic export products gain competitiveness in foreign markets, but it also results in an increase in the prices of imported products. Overall, the REER variables made a small negative contribution to the real GDP growth projections.


In October, Georgia’s exports registered a slight annual decline of 2.2%, mainly due to lower exports / re-exports of cars and trucks and hard liquor to Armenia; motor cars, tobacco and carbon steel rods to Azerbaijan; motor cars, medicines, natural grape wines and mineral waters to the Kyrgyz Republic; and ferroalloys and frozen lamb / goat meat to Iran. At the same time, Georgian exports to China (due to increased exports / re-exports of precious metals as well as copper ores and concentrates) and Saudi Arabia (due to increased exports of ‘living animals) have increased considerably.

During this period, merchandise imports decreased by 23.5%, driven by a reduction in imports of petroleum and petroleum products from Russia (mainly due to a significant annual decline in crude oil prices on the International market). Other imports concerned included: motor cars from the United States; ores and concentrates of copper from Brazil; coke-bitumen petroleum and paving slabs from Iran; and automobiles from Germany. In contrast, Georgian imports of precious metals and concentrates from Armenia; Azerbaijan’s petroleum and copper ores and concentrates have grown annually. As a result, the trade deficit shrank considerably by 34.8% per year and amounted to $ 393.5 million. Overall, trade-related variables have made a positive contribution to the GDP growth forecast.

Influx of money.

After a significant slowdown in remittances at the start of the year, inflows have been on the path to recovery since June. In October, remittances grew 18.6% annually to reach $ 181.7 million. The main contributors to this increase were Ukraine (151.9% yoy, contributing 4.3 ppts), Italy (30.9% yoy, 4.2 ppts), the United States ( 39.5% yoy, 3.9 ppts), Greece (23.6% yoy, 2.5 ppts), Germany (74.6% yoy, 2.2 ppts), Azerbaijan (145.1% yoy, 2.1 ppts) and Turkey (26% yoy, 1.4 ppts). While cash inflows declined from the Kyrgyz Republic (83.1% yoy, -1.7 ppts), Russia (7% yoy, -1.7 ppts) and Kazakhstan (44% yoy, -0.9 ppts). The resumption of remittances made a significant positive contribution to the growth forecast.

International Visits and Tourism.

Tourism arrivals and receipts have declined sharply due to numerous travel bans, as well as precautionary behavior on the part of potential tourists. In October, the number of international visitors decreased by 92.5% per year (boosted by Russia [-17.1 ppts], Azerbaijan [-17.4 ppts], Armenia [-16.8 ppts] and turkey [-10.2 ppts]), while the decrease in the number of tourists (visitors having spent 24 hours or more in Georgia) amounts to 88%. Overall, the dramatic drop in the number of visitors and tourists, as well as a sharp decrease in tourism spending, contributed negatively to the growth forecast.


In October, annual consumer price inflation rose to 3.8%, which is only slightly above the target of 3%. Notably, inflation converged towards the target value at the end of 2020. About 1.5 percentage points of CPI inflation was linked to rising food prices (annual increase of 5.4% ), while tobacco prices contributed 0.4 percentage point (13.5% annual growth). However, the fall in oil prices (16.7% per annum) made a notable negative contribution (0.6 ppt) to the annual measure of inflation. This latter trend is mainly a reflection of the significant drop in oil prices on the world market (the spot price of Brent in Europe (COP) has decreased by 32.7% per year). Overall, the CPI variables made a positive contribution to the GDP forecast.

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

By Davit Keshelava and Yasya Babych

December 17, 2020 7:11 PM

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