Georgia: Country outlook
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- Economist Intelligence Unit
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Georgia: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Economist Intelligence Unit expects the forecast period to be characterised by political polarisation, popular discontent with the government and periodic protests. We expect the ruling Georgian Dream-Democratic Georgia (GD-DG) to remain in power at least in the early part of our forecast period as the party has a stable parliamentary majority and remains the party with the highest degree of public support. However, there is an increased risk of public discontent and political instability.
ELECTION WATCH: The parliamentary election, which was held in two rounds in October and November 2020, resulted in a definitive victory for GD-DG. The party won 90 seats and 48.2% of the vote. The second-largest political force is the Strength is in Unity coalition, which won 36 seats and 27.2% of the vote. Strength is in Unity is an opposition bloc led by the United National Movement (UNM), the party of a former president, Mikheil Saakashvili. The poll was held under the reformed electoral system; the lowering of the threshold for entering parliament allowed smaller parties to secure seats. In the second round of the election, GD-DG won all single-member districts as all opposition parties boycotted the vote. The election was considered broadly free and fair by international observers, but all monitoring missions noted significant voting irregularities, such as voter intimidation and vote-buying, which will continue to weigh on the legitimacy of the electoral system. The next parliamentary election is scheduled to be held in 2024.
INTERNATIONAL RELATIONS: Relations with Russia deteriorated significantly in mid-2019 after protests against the participation of a Russian member of parliament in an event at the Georgian parliament led to violent clashes with the Georgian police. In response, the Russian president, Vladimir Putin, imposed a ban on flights to Georgia. The rise in tensions threatened to reverse the partial normalisation of relations since 2012, which had enabled the restricted reopening of trade and transport links that had been severed following the 2008 war.
POLICY TRENDS: The main policy priority of the government is combating the coronavirus (Covid-19) pandemic. Following a sharp surge in cases in November-January, daily new cases fell to 382 on March 17th compared with a peak of 5,450 on December 5th (9.6 and 136.8 per 100,000 people per day respectively). From the beginning of March the government began loosening restrictions and most businesses have now been reopened. The national curfew remains in place. On March 15th the government began its vaccination rollout after it received about 42,000 doses of the Oxford University-AstraZeneca (UK-Sweden) vaccine, prioritising healthcare workers. Georgia is primarily relying on the World Health Organisation-led COVAX scheme to receive vaccines, and we expect that widespread vaccination will be achieved only by 2023.
ECONOMIC GROWTH: We estimate that real GDP contracted by 6.5% in 2020, owing to the coronavirus pandemic and the consequent decline in domestic and external demand. In 2021 we expect a partial rebound, with real GDP growth of 4%, in line with our forecast for a modest global recovery. The rebound will be driven by private consumption--which will increase, although only by 3.1%--and by a recovery of external trade. We expect pandemic-related uncertainties to continue to have a negative impact on tourism, which in a typical year accounts for about 10% of GDP; an only limited recovery in this sector will weigh on growth in 2021. The government's stimulus packages will help to offset some of the negative impact of the latest lockdown restrictions, but we expect economic performance in the first quarter of 2021 to be significantly worse than in the year-earlier period. Unemployment will remain elevated.
INFLATION: Inflation stood at 5.2% in 2020, in line with our expectations. In 2021 we expect average inflation to remain elevated at 4.7%, above the central bank's 3% target. Despite weak demand in the first quarter as a result of coronavirus restrictions at home and abroad, consumer prices rose by 2.8% in January and 3.6% in February, up from 2.4% in December. We believe that higher oil prices will drive inflationary pressures but tighter monetary policy will be able to keep the headline inflation rate below 2020 levels. In 2022-25 we forecast that inflation will average 3.9%. Higher oil prices will raise the prices of imported goods and food.
EXCHANGE RATES: Given the openness and small size of Georgia's economy, the lari exchange rate is driven by movements on the current account, including seasonal factors (such as tourism) and demand for merchandise imports. Movements in the Russian rouble and the Turkish lira also have an influence. The lari depreciated by about 13% against the US dollar between end-2019 and end-2020 as a result of a widening current-account deficit and a weakening of the rouble and the lira. In 2021 we expect the currency to stabilise and average Lari3.34:US$1, compared with Lari3.29:US$1 at end-2020. The lari will gradually depreciate in the forecast period, in response to a continued wide current-account deficit and volatility in the rouble and the lira.
EXTERNAL SECTOR: We estimate that the current-account deficit widened to 11.7% of GDP in 2020, owing to a sharp narrowing of the services surplus. In 2021 the current-account deficit will remain sizeable, at 8% of GDP. We expect supply chains to be reinstated, and a recovery in domestic demand should boost imports, which will ensure a continued wide trade deficit. In addition, international tourism is likely to remain significantly below its typical level over the summer months. We expect the current-account deficit to narrow to an average of 6.1% of GDP in 2022-25, owing to robust services and goods export growth. This will be partly offset by a modest pick-up in global oil prices, as Georgia is an energy-importing country.
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