BAKU, Azerbaijan, November 16
By Tamilla Mammadova – Trend:
Interest rate increases by Georgia's National Bank of Georgia (NBG) demonstrate the authorities' willingness to address inflationary pressures stemming from currency depreciation, Trend reports via Fitch Ratings.
Georgia's record of macroeconomic resilience against regional shocks supports its 'BB'/Stable rating, which we affirmed on 16 August, said the company.
"The NBG increased its refinancing rate by 100 pp to 8.5 percent on 23 October, following two 50 pp rate hikes in September. Inflation has overshot the NBG's 3 percent target, rising to 6.9 percent year-on-year in October, from 6.4 percent in September, 4.9 percent in August and 4.6 percent in July. This was partly due to sustained depreciation of the lari, as well as one-off factors such as an increase in excise tax on tobacco," said the report.
Fitch also noted that a floating currency has acted as a buffer to the external shock of the Russia flight ban.
"The current account deficit narrowed to 3.2 percent of GDP in 2Q2019 from 8.2 percent a year earlier and preliminary balance of payment data indicate an improvement in 3Q2019, according to the NBG," said the report.
"The current account has been supported by import contraction and resilient tourism earnings in spite of the Russian ban. Tourism receipts were $2.6 billion over nine month of 2019, a 0.5 percent year-on-year increase, and tourism arrivals have continued to grow, albeit more slowly in September, despite a large reduction in arrivals from Russia," Fitch said.
The report notes that the floating exchange rate has also helped conserve reserves.
"These have grown by $313 million since early 2019 to $3.6 billion at September. This represents a 14.3 percent year-on-year y increase, despite recent declines after the NBG sold over $70 million in August and September to curb excessive depreciation expectations and exchange rate volatility," Fitch said.
"The NBG estimates that the lari current nominal effective exchange rate is undervalued. Combined with a stronger external position, a tighter monetary policy stance, and below-trend economic growth, this suggests currency appreciation pressures could arise and bring inflation back towards target in 2020 and 2021. Monetary policy easing could resume in the medium term," says the report.
"But we think the NBG will maintain its proactive approach and be ready to tighten monetary policy further if price pressures from lari depreciation are not neutralized," the Fitch said.
In addition to rising inflation, possible risks from a weaker currency arise from government debt sensitivity to the exchange rate, high external debt, and high dollarization in the banking sector, said the agency.
Fitch forecasts Georgian economic growth to decelerate to 4.3 percent in 2019, as credit growth slows down due to the enforcement of tighter lending standards by the NBG, and the Russian flight ban restricts more substantial expansion of the tourism sector.
"Annualized credit growth slowed down in 1H2019 to 7.7 percent (net of exchange-rate effects), from 17.2 percent in 2018. GDP growth will remain above the forecast current 'BB' category of 3.3 percent as accelerated infrastructure spending and slightly looser fiscal policy will support a pick-up to an average of 4.7 percent in 2020-2021," the report said.
"Higher infrastructure and education spending means we forecast the augmented fiscal deficit to widen to 2.7 percent of GDP this year from 2.5 percent in 2018. Lari depreciation will also increase gross general government debt/GDP to a forecast 47 percent this year," said Fitch.
The company expects the Government Debt Management Strategy 2019-2021 and quantitative targets under Georgia's IMF program to provide a policy anchor that will help put gross general government debt/GDP on a downward trajectory in the medium term.
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