Baku, Azerbaijan, August 10
By Tamilla Mammadova – Trend:
Georgia’s economic growth was strong at 4.9 percent in 1H2019, helped by continued improvement in trade balance as well as supportive monetary and fiscal policies, Trend reports citing the research of investment company Galt & Taggart.
The monetary policy rate cut in the beginning of 2019 stimulated lari lending making credit portfolio growth healthier. At the same time, acceleration of public infrastructure spending made fiscal stance expansionary but fiscal deficit projected below 3 percent of GDP in 2019 with contained current spending.
Improved external balance enabled National Bank of Georgia to build reserves in 1H2019, which stood at record-high $3.7 billion.
This stimulated de-dollarization and growth, but limited lari’s appreciation trend - short-term cost for long-term benefit. Rise in inflation from March 19 mostly reflected one-off factors of higher tobacco excises, keeping currency pressures muted on prices as demand was weak.
The lari reached its historic lows at 2.97 lari/1 USD on 1 August 2019, as negative expectations were mounting despite better than expected tourism data in July and positive macroeconomic dynamics. With an aim to limit market overreaction, the National Bank of Georgia intervened on the foreign exchange market and sold $32.8 million out of offered $40 million on 1 August.
As a result of this intervention the lari quickly strengthened by 2.9 percent from 2.97 lari/1 USD to 2.89 during 1-2 August, before weakening again. The intervention followed the central bank’s statement that despite positive foreign and domestic macroeconomic dynamics, the lari’s recent excessive depreciation related to tourism shock and negative expectations, created risks to price stability.
The bank also committed to use other monetary policy tools to support the currency if needed. Importantly, lari’s REER (real effective exchange rate) and NEER (nominal effective exchange rate) weakened by more than 10 percent, hinting at excessive undervaluation of the currency.
As fundamentals remain strong and fresh data on July tourism is better than projected, lari reflects the lack of confidence currently.
"Lower lari deposit growth and a shift from lari to foreign currency deposits along with stronger lari borrowing cause short-term currency pressure. With lari’s REER and NEER weakened and Current Account deficit set to shrink in 2019 helped by lower imports, we see lari extremely undervalued – by 10-13 percent currently," the company's report said.
“We expect lari to strengthen toward 2.75-2.80 against USD through 2019 and further to 2.60-2.65 in 2020. Moreover, recent rise in treasury yields indicate that market already priced in possible policy rate hike from the National Bank of Georgia on 4 September meeting, which will also be lari positive,” the report said.