Outlook Improving On Russian Trade Renaissance

BMI View : An increase in Georgian-Russian trade will bolster real GDP growth in Georgia in 2014 and 2015, with a trade rapprochement with what was once Georgia's largest trading partner reducing net exports' drag on growth. In addition, the Georgian government's plan to construct a US$5bn deep-sea port would boost growth in the long term as the country positions itself as a regional transport hub.

The Georgian economy is set to continue on its path of moderate real GDP growth in 2014 and 2015, with the government's new sovereign wealth fund opening the economy to increased foreign investment and set to spur a reversal in the declines in gross fixed capital formation recorded in 2013. Q413 real GDP growth surprised to the upside, coming in at 6.9% year-on-year (y-o-y), up from just 1.4% y-o-y in the previous quarter, and lifting real GDP growth for 2013 to 3.1%, above our forecast for growth of 2.7%. While a breakdown of the composition of growth for the quarter is yet to come out, a not insignificant increase in consumer price inflation (0.6% y-o-y in November to 2.9% y-o-y in January) indicates that the primary driver of growth was an increase household consumption, although we do not believe this consumer boom will continue into 2014. We forecast real GDP growth of 4.4% in 2014, rising to 5.2% in 2015.

In addition to the establishment of a US$6bn sovereign wealth fund, that is set to gain a US$1bn investment from former Prime Minister and billionaire Bidzina Ivanishvili, the opening of a new US$5bn deep-water cargo port will assist in the government's efforts to establish Georgia as a regional logistics hub. The country is well placed to benefit from increased investment in shipping and freight, with Georgia ranked 72nd out of 191 countries in our Global Logistics Index. This places the country ahead of regional peers Armenia (108th) and Azerbaijan (129th), and 12th out of the 30 countries in Emerging Europe. With our Shipping and Freight team relatively bullish towards Georgia's emerging position as a transport and logistics hub between Central Asia, the Middle East and Europe, we believe the sector will become a valuable source of investment for Georgia in the medium-to long term.

Q413 Growth Surprises To The Upside
Georgia - Real GDP Growth, % and Components by Expenditure, GELmn

BMI View : An increase in Georgian-Russian trade will bolster real GDP growth in Georgia in 2014 and 2015, with a trade rapprochement with what was once Georgia's largest trading partner reducing net exports' drag on growth. In addition, the Georgian government's plan to construct a US$5bn deep-sea port would boost growth in the long term as the country positions itself as a regional transport hub.

The Georgian economy is set to continue on its path of moderate real GDP growth in 2014 and 2015, with the government's new sovereign wealth fund opening the economy to increased foreign investment and set to spur a reversal in the declines in gross fixed capital formation recorded in 2013. Q413 real GDP growth surprised to the upside, coming in at 6.9% year-on-year (y-o-y), up from just 1.4% y-o-y in the previous quarter, and lifting real GDP growth for 2013 to 3.1%, above our forecast for growth of 2.7%. While a breakdown of the composition of growth for the quarter is yet to come out, a not insignificant increase in consumer price inflation (0.6% y-o-y in November to 2.9% y-o-y in January) indicates that the primary driver of growth was an increase household consumption, although we do not believe this consumer boom will continue into 2014. We forecast real GDP growth of 4.4% in 2014, rising to 5.2% in 2015.

Q413 Growth Surprises To The Upside
Georgia - Real GDP Growth, % and Components by Expenditure, GELmn

In addition to the establishment of a US$6bn sovereign wealth fund, that is set to gain a US$1bn investment from former Prime Minister and billionaire Bidzina Ivanishvili, the opening of a new US$5bn deep-water cargo port will assist in the government's efforts to establish Georgia as a regional logistics hub. The country is well placed to benefit from increased investment in shipping and freight, with Georgia ranked 72nd out of 191 countries in our Global Logistics Index. This places the country ahead of regional peers Armenia (108th) and Azerbaijan (129th), and 12th out of the 30 countries in Emerging Europe. With our Shipping and Freight team relatively bullish towards Georgia's emerging position as a transport and logistics hub between Central Asia, the Middle East and Europe, we believe the sector will become a valuable source of investment for Georgia in the medium-to long term.

Private Consumption

Weak real GDP growth in 2013, in comparison to 2012, has been largely attributable to a slowdown in private consumption, with a sustained period of deflation resulting in consumers deferring purchases as expectations remained for prices to continue heading lower. Our expectations for an increase in consumer price inflation over the course of 2014, driven by supply-side factors (primarily rising wholesale food prices), will further suppress any real wage rises, restraining private consumption growth.

Notable Drop Off In Q313
Georgia - Real Wage Growth, % chg y-o-y

One factor that will restrain private consumption will be the slowdown in foreign remittance growth in 2014. Foreign remittance inflows equated to 11.1% of GDP in 2013, making Georgia the 18th most reliant economy on remittances globally. With our forecasts for the three largest sources of inward remittances to Georgia, Russia (54.2% of total), Greece (13.4%) and Italy (7.5%), to record minimal growth in 2014 we would expect to see total remittance inflows stagnate, reducing household purchasing power.

Stagnation In Source Economies Spells Trouble For Remittances
Georgia - Remittance Inflows, US$mn

Government Spending

Government expenditure declined substantially in year-on-year terms in the first three quarters of 2013, averaging a 7.0% fall in the period compared to the first nine months of 2012. We expect this trend to reverse in 2014, with the Georgian government's sizeable budget surplus affording more opportunity for state spending in the quarters ahead. As a result we forecast state expenditure to rise 1.2% y-o-y in 2014, contributing 0.2 percentage points (pp) to headline GDP.

Gross Fixed Capital Formation

With the regional export outlook remaining precarious in 2013 it was little wonder that gross fixed capital formation (GFCF) proved weak over the course of the first three quarters, declining an average 12.6% over the same period in 2012. However, we do not expect this to continue in 2014, with the economic rapprochement between Russian and Georgia set to continue apace. This will bolster fixed investment levels as Georgian and foreign firms become more confident as to the country's economic stability, in conjunction with an opening of what was, prior to the 2006 diplomatic spat, Georgia's largest export market.

Foreign Direct Investment To Bolster IP
Georgia - Industrial Production, % chg y-o-y

Net Exports

While Georgia will continue to run a sizeable trade deficit over the course of our forecast period we are confident that it will narrow in 2014 and 2015 as trade with Russia continues to expand. In 2001 Russia accounted for 23.4% of total Georgian exports, but in 2012 had fallen to just 3.4% of the total. A recovery in bilateral trade\ will result in net exports proving less of a drag on the headline growth rate, with our forecast for net exports to contribute 0.3pp to real GDP growth in 2014.

Export Growth To Continue Outpacing Imports
Georgia - Exports and Imports, 3mma % chg y-o-y

Risks To Outlook

With the rapprochement between Georgia and Russia still in its nascent stages, we do not rule out a political event that could derail the process, which would present significant downside risks to our relatively buoyant forecast for 2014 and 2015. Given the more pro-EU stance taken by Garibashvili, and his commitment that Georgia would sign an Association Agreement with the EU by August 2014 we could see the Kremlin take a more aggressive trade stance towards its southern neighbour, ending the recovery in bilateral trade.

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Related sectors of this article: Economy, Economic Activity
Geography: Georgia, Georgia
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