2022 April-May Analysis

G&T downgrades Georgia’s 2022 economic forecast following outbreak of war

In its December 2021 economic report, Galt and Taggart predicted that Georgia would see GDP growth of 5% in 2022, with the lari’s value hovering around 3.1 GEL/USD and a central bank interest rate of 9% in the second half of the year. However, the outbreak of war in Ukraine and its economic repercussions for both global markets and the region have forced analysts to downgrade their forecasts for the year.

Growth Scenarios

Considering the ongoing war between Russia and Ukraine, G&T has downgraded its expectations for Georgia’s economic performance in 2022, with a revised GDP growth forecast somewhere between 3% and -1% in a worst-case scenario.

Even though there will be an economic impact, analysts note that stable macroeconomic factors, a healthy banking sector, and prudent monetary and fiscal policies indicate that the country is in a good position to navigate economic shocks from the war.

Exports, remittances, and tourism are all projected to reduce compared to the initial forecast for 2022, but the war’s impact is expected to be considerably smaller than the onset of the pandemic in 2020. Both of G&T’s growth scenarios forecast a depreciation of the lari’s value and a year-end central bank interest rate between 10.5% and 11%, up from its pre-war prediction of 9%.

Analysts now predict that Georgia’s war-related losses in the external sector this year will amount to USD 2 billion; however, G&T’s Head of Research Eva Bochorishvili notes that Georgia’s connection to other economies in the region may offset some of the negative consequences of the war.

“Georgia is very related to other regional economies. If oil prices increase, then Azerbaijan’s economy will benefit, and that could translate to benefits for Georgia in the form of increased exports or higher tourism numbers. Also, many analysts are noting that a lot of Russian businesses and capital is flowing into Armenia right now. This could boost Armenia’s economy, which is an upside for Georgia considering our trade and tourism ties with the country.”

Bochorishvili says that G&T’s tourism forecasts for this year are pessimistic but that a potential influx of Russians, Belarusians, and Ukrainians coming to Georgia could inject additional money into the economy and drive demand for real estate. “These developments”, she notes, “may mitigate the negative effects of the war on Georgia’s economy to some extent.”

Scenario 1

Galt & Taggart’s “best-case scenario” operates on the assumption that the war between Russia and Ukraine will be resolved within one to two months. Accounting for the current level of EU and US sanctions on Russia throughout the end of this year, this scenario forecasts 3% GDP growth in 2022. It predicts the lari’s value will average around 3.25 GEL/USD and that the central bank interest rate will hit 10.5% at year’s end, with inflation at 7%. This scenario foresees tourism revenue at 75% of its 2019 level, down from the initial expectation of 85%.

Scenario 2

In its “worst-case scenario”, G&T predicts a protracted conflict in Ukraine that lasts through the end of 2022 and results in more severe sanctions levied against Russia, including a European import ban on Russian oil and gas. In this case, Georgia’s economy is expected to contract by 1% with an annual inflation rate of 9%. This scenario foresees an average lari value of 3.4 GEL/USD and a year-end interest rate of 11%, with tourism revenue at only 60% of its 2019 level.

According to Bochorishvili, the current situation seems to be most closely aligned with the first scenario: “Currently, we think the 3% growth scenario is more probable. However, it is difficult to predict the exact outcome because the situation is based on a number of factors that are rapidly changing.”

Georgia’s exposure to Russia and Ukraine

Analysis of Georgia’s exposure to Russia and Ukraine indicates that exports and tourism are expected to be the hardest hit by the war. Russia and Ukraine made up a combined 21.6% of all Georgian exports last year, and categories like wine and spirits as well as agricultural products are projected to suffer the most. In 2021, Ukraine and Russia made up a combined 25.4% of total tourism revenue, which equates to 1.7% of Georgia’s GDP.

Investments from Ukraine and Russia equate to less than 6% of Georgia’s annual FDI. The country’s financial linkages to Russia are limited to VTB Bank Georgia (which accounts for only 4.5% of the country’s total banking assets), and the NBG announced in late February that these assets would be transferred to other Georgian banks in compliance with EU and US sanctions.

Another positive development that indicates Georgia should be able to weather the economic fallout from the war is its decreasing dependency on Russian remittances in recent years. While Georgia once (2010-2014) relied on Russia for more than 50% of annual remittances, that figure amounted to less than 20% in 2021.

G&T’s Bochorishvili says that this shift is due to two primary reasons. “One reason has to do with the Russian economy.

The pandemic hurt Russia’s economy, and we also saw the ruble depreciate after 2014-2015 when the price of oil collapsed. The second reason is that we’ve seen a decrease in Georgians moving to Russia to work. Many have chosen different labor markets in recent years.”

She says that this shifting trend will help Georgia as the economic conditions in Russia continue to worsen and remittances diminish in the coming months, noting that “we expect that remittances coming from other countries like the US, EU, and Israel will compensate for these losses.”