2020 June-July Analysis Featured

ISET’s indices – a guide to the Georgian economy

How can the impact of the pandemic on the Georgian economy be described in numbers? By now, most people will be familiar with the impact on Gross Domestic Product, and its expected downturn of 4% or more. At the same time, the impact can also be traced through additional indicators offered by the Policy Institute at the International School of Economics in Tbilisi (ISET). These indicators, some of which have become well known, help to chart economic developments in Georgia over the years.

The Khachapuri Index indicates that overall everyday food prices have gone up. As compared to the same time in 2019, the price of a khachapuri in fact increased by 25%, reflecting inflationary pressures. The increase was driven in particular by an increase in the cost of cheese. The cost of cheese, according to researchers at ISET, rose because of the depreciation of the Georgian lari because a significant amount of cheese production still relies on milk imports. Other costs, such as eggs, stayed fairly stable.

The Khachapuri Index highlights the squeeze for households: while the pandemic has slashed incomes, the cost of some key everyday ingredients has gone up. As Ia Katsia, a senior researcher at the Policy Institute at ISET puts it: “usually, price trends observed by the Khachapuri Index are in line with GeoStat’s Consumer Price Index (CPI); however, the Khachapuri Index more closely captures food price inflation, rather than the overall inflation level in the country.” Modeled on the (lighthearted) Big Mac Index by The Economist magazine, the Khachapuri Index measures the kind of inflation that matters most to household subsistence: the cost of milk/cheese, flour, eggs, as well as energy for cooking/heat. The Khachapuri Index does capture seasonal variation of cost: in April, for example, the cost usually decreases slightly, as more milk becomes available in spring. The ISET team did have to adapt its data collection during the pandemic: rather than going to the markets themselves, they solicited readers and coworkers to provide information on the prices they found.

The Consumer Confidence Index (CCI) may be a good tool for tracking the recovery as well. In May 2020, expectations had improved by 14 index points over the historic low of the previous month. The present situation, however, was still described as dire, and was almost 20 points lower than in May 2019, deep in negative territory. This will be an indicator to watch in the coming months. As the ISET team says: “consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.” Confident consumers are more likely to spend, making the indicator relevant to businesses across the economy.

For measuring consumer confidence, ISET interviews a random sample of 300-350 consumers, using a methodology similar to indices in other countries. A previous low for consumer confidence was in 2015. Senior researcher Tamta Maridashvili explains that five years ago, a decline of oil prices led to currency crises in Russia and Azerbaijan, “which was transmitted to the other countries in the region, including Georgia. Also, prices dropped on copper and manganese which are among the top export commodities of Georgia.”

How do Georgian consumers compare to those abroad? Maridashvili has sobering news. “In general, Georgian consumers are much more depressed when compared to the developed world. So far, it has never happened in Georgia that the CCI rose above zero which means that we always have more pessimistic consumers than optimistic ones.”

On the company side, the Business Confidence Index (BCI) shows a sharp decline , especially in expectations. Businesses foresee an extended period of difficulty in the future. At the end of the second quarter, the Business Confidence Index was -41 , lower than it had ever been. A confidence index of +100 would indicate all companies being optimistic, and zero indicates a balance of positive and negative views.

The BCI is also a key indicator to watch. Mariam Katsadze, a senior researcher at the Policy Institute, highlights that in the past it has tracked the significant drop of confidence in the summer of 2019, due to the ban on Russian tourists. At that point, confidence fell from +45 to +22. Subsequently, confidence recovered in the beginning of 2020 as Georgian businesses adapted. The high point was in the summer of 2018, when the Business Confidence Index was at +67, probably lifted by the surge in tourism that contributed to activity in other sectors, such as construction.

For this index, the ISET team interviews more than 150 companies, of which 35 are large companies, and the remainder are small to medium enterprises. As Mariam Katsadze, research assistant at ISET explains, the “BCI is based on the Joint Harmonised EU Programme of Busines and Consumer Surveys methodology”, and can be compared internationally, even if countries often scale the results differently.

The data for the Real Estate Index for the second quarter of 2020 is not yet available, but this indicator, too, will be key for tracking the recovery. Over the years, the Real Estate indicates shows a continued increase in supply on the real estate market. More granular data in a report co-published with TBC Bank and ForSet for the first quarter of 2020 show the most expensive (Mtatsminda, $1,255 average per square meter) and least expensive (Samgori, $624) districts of the capital.

The Real Estate Index also illustrates that recent mortgage regulations had an impact: in the last quarter of 2018, before new regulations came into effect, transactions surged by 30% over the level at the be-ginning of the year, as purchasers took advantage of existing mortgage rules. After the restrictions came into effect, transactions plummeted. The data for the second quarter of 2020 will help to map the impact of the pandemic on real estate prices, and on the volume of transations.

All the indices of the Policy Institute are available directly from ISET’s website (www.iset-pi.ge). The page also lists additional indices, such as the quarterly Electricity Market Review. The website explain the methods and also the limitations of each index. This work is made possible by the generous support of several donors, especially the Swedish government, which have helped ISET develop these analytic tools, provided in Georgian and English. The pages also list the contact details for the lead researchers, allowing direct exchange.

Only one indicator may be missing: how much do businesspeople in Georgia use the information put together by the Policy Institute? This article, hopefully, should increase awareness and lead to even more people using the great data that the Policy Institute provides.

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