Please refer to important disclaimers on the final page of this document.

Georgia maintains its position as a stellar performer globally in terms of COVID-19

response, with one of the lowest active coronavirus cases at three per 100,000 people.

Since lifting quarantine restrictions, daily new cases have remained very low (unlike in

many other countries, including neighboring Azerbaijan and Armenia), at between one

and 10 cases, mostly related to transit cargo drivers. Notably, despite the earlier

communication that Georgia’s borders would be open for international tourism from 1 July

2020, the government extended the restrictions, with regular flights suspended until

further notice. Later, the government announced that it would unconditionally reopen

borders to the citizens of five EU countries – Germany, France, Estonia, Latvia, and

Lithuania – arriving via direct flights, and business travelers from all countries with the

prior approval of the relevant government agency. This worsens the outlook for

international tourism, but a strong rebound in remittances, a V-shaped recovery in

consumer expectations, the resumption of domestic tourism and normalized business

activity make us optimistic about recovery dynamics.

Recent economic trends

April and May reported almost similar economic contraction (-16.6% and -13.5%,

respectively), as both months were non-working, with a nationwide curfew and lockdown

restrictions in force. Economic uncertainty remained at a record high, according to the

consumer confidence index by ISET, but consumer expectations saw a V-shaped

recovery in May, amid a stabilized GEL, success in fighting COVID-19 and the imminent

economic reopening. Unemployment increased considerably in May-June, with 105,000

self-employed workers receiving a one-off GEL 300 subsidy, and 125,000 people who

had lost their formal jobs receiving a GEL 200 monthly subsidy. However, recovery

dynamics were strong as remittances improved in May and grew strongly (+17.8% y/y) in

June, alleviating the pressure from labor market weakness and the absence of tourism.

Notably, the increased unemployment is mostly concentrated in tourism-related sectors

where wages are generally low. As a result, consumer demand improved in June, based

on banking card payment data; spending on non-essential goods and services saw a V-

shaped recovery in June and growth in non-discretionary spending was flat vs. April

despite front-loaded demand. VAT turnover statistics (a good proxy for economic activity)

also demonstrate a recovery in business activity, mostly in trade, construction, real estate

and manufacturing. This also implies that the contraction in April-May was mostly due to

restrictions on physical access to goods and services rather than demonstrating the

extent of demand collapse. External trade statistics for June also support the argument

for domestic/external demand as reduction in both exports and imports halved (-14.0%

y/y in exports and -22.0% y/y in imports) after exports decreased by an average of 29.9%

y/y and imports fell 37.9% y/y in April-May. Considering June’s statistics, we expect the

economic contraction to fall to a single digit rate (-5-7%) in June with further

improvements anticipated in the coming months.

Georgia │ Economy July 21, 2020

Eva Bochorishvili Head of Research │ evabochorishvili@gt.ge │ +995 32 2401 111 ext. 8036

Lasha Kavtaradze Head of Macroeconomic Analysis and Forecasting │ lashakavtaradze@gt.ge │ +995 32 2401 111 ext. 7473

Georgian Economy Ongoing Recovery Despite Labor Market Weakness and Tough Times for Tourism

Georgia │ Economy

July 21, 2020

2

Notably, weakness in economic activity also reflected significantly reduced government

spending in April-May (especially in May with capital expenditure down 41.1% y/y),

which is set to recover with the resumption of economic activity. The government’s

business support measures and mortgage interest rate subsidies are also expected to

boost bank lending recovery. Additionally, consumer spending should be helped by

increased wages (+200mn) for soldiers, nurses, teachers, etc. and increased pensions

from July.

Tourism remains a major weakness. Therefore, before any full-scale recovery in

international travel, the industry will need a prolonged period of banking loans interest

rate subsidies and property and income tax relief, in our view. However, we expect

Georgian tourists to spend US$ 500mn locally in 2H20 (of which US$ 300mn will be

generated from locals not traveling abroad and US$ 200mn generated from ordinary

local tourist spending), bringing some relief to the industry. In our base case scenario,

we expect a weak recovery in tourism (with revenues projected to decrease by 64% y/y

in 2H) and GDP growth at -5.1%, down from our -4% growth projection in April. Even

with sharper decline in tourism, recovery dynamics can be supported by election related

spending, acceleration in public capital expenditures (with c.70% of budgeted amount

to be spent in 2H) and growing remittances, which we hope to continue. However, we

do not rule out the likelihood of a pessimistic scenario – generally, the neighboring

countries of Turkey, Azerbaijan, Armenia and Russia account for 70% of total arrivals,

and as the epidemiological situation remains unfavorable in these traditional source

markets, the timeline for reopening borders is still unclear. Visitors from other countries

could therefore barely compensate for the revenue shortfall from neighbors. In our

pessimistic scenario we project the economic contraction to widen to 8.6% in 2020,

assuming tourism revenues to fall by 90% y/y in 2H20, underspending in public capital

expenditures and further deterioration in expectations. Therefore, there is a likelihood of

a V-shaped recovery in the Georgian economy, but if the weakness in tourism persists

and consumer and business confidence deteriorates, we might see a U-shaped scenario

in which the utilization of government deposits in 4Q20 and 1Q21 and policy easing from

the central bank will be instrumental in supporting the economy.

Currency

The GEL hit a record low of 3.48 vs. US$ on 27 March 2020, then stabilized at 3.2/US$

(supported by the NBG’s interventions) and started to appreciate from mid-May, trading

at close to 3.0/US$ since June. The currency’s trajectory reflects a combination of

different factors: the conversion of FX deposits into GEL (while the inverse was one of

the major reasons for the GEL weakness in March), low demand and a similar trend of

appreciation amongst other regional currencies. By our rough estimates, the external

balance deteriorated by US$ 306mn (netting out trade balance, remittances and

tourism) in 1H20. The NBG’s FX sales, to the sum of US$ 215mn in 1H, largely offset

the FX shortfall. With the ongoing recovery and increased demand for imports from

public capex and businesses, the NBG is expected to intervene to ease pressure on the

GEL, and we expect additional FX sales totaling US$ 200mn this year. However, despite

these interventions, international reserves are anticipated to increase from the current

US$ 3.6bn at the end of 2020 as reserves are replenished by borrowing from donors.

Georgia │ Economy

July 21, 2020

3

Annual inflation has retreated gradually since the start of the year, reaching 6.1% in

June 2020, though still far above the central bank’s 3% inflation target. We forecast 5.2%

annual average inflation in 2020. The increase in inflation is related to the strengthening

influence of GEL weakness and disruption to supply chains. The NBG cut rates twice

this year, to 8.25%, to support economic activity despite the ongoing high inflation. We

expect additional rate cuts of 0.5-0.75ppts until the end of 2020, and given the time delay

in interest rate transmission, a rate cut in August is desirable. We expect further cuts if

Georgia takes longer than currently projected to recover.

Government measures

The government’s revised 2020 budget document was approved by parliament in June

2020. The revised budget incorporates the fiscal parameters agreed with the IMF, US$

1.5bn in donor funding and fiscal stimulus measures for businesses and households

affected by the coronavirus pandemic. The budget framework assumes -4.0% GDP

growth in 2020 and sets the deflator at 4.8%. The fiscal deficit is projected to increase

to 8.5% of GDP due to the shortfall in revenues (GEL 1.45bn reduction compared to the

initial budget) and an increase in expenditure for anti-crisis measures (GEL 1.4bn

increase compared to the initial budget). To meet its spending needs, the government

plans external borrowing to increase by GEL 4.3bn, and domestic debt is set to rise by

GEL 649mn, with total public debt projected at 54.4% of GDP in 2020. The government

plans to return to its pre-crisis debt parameters in the medium term. Notably, the

government is borrowing more from donors than it currently needs, building a fiscal

buffer totaling GEL 2.7bn into the revised budget. Such a buffer builds confidence as

funds can be utilized if the crisis deepens or a recovery takes longer than currently

projected to materialize. Importantly, the government needs to put more emphasis on

the timely implementation of infrastructure projects to support economic recovery, as

generally these projects lag budgeted figures.

Table 1: Government's Business Assistance Measures, 2020 budget

Table 2: Government's Social Assistance Measures, 2020 budget

# Covid-19 one-off business supporting measures

GEL mn As % of

GDP

#

Covid-19 one-off social assistance measures

GEL mn As % of GDP

1 Credit-guarantee scheme 330 0.7% 1 Healthcare-related costs of Covid-19 (testing, treatment, etc.)

285 0.6%

2 Flight subsidies and quarantine service 45 0.1% 2 Health system preparedness improvement

60 0.1%

3 Loan interest rate subsidy for hotels 70 0.1% 3 Compensation for self-employed persons who lost jobs (one-off GEL 300)

75 0.1%

4 Property tax exemption for hotels 45 0.1% 4 Compensation for private sector employees who lost jobs (GEL 200 for 6 months)

450 0.9%

5 Small grants 20 0.0% 5 Income tax relief to businesses who retain workers for 6 months

250 0.5%

6 Construction sector support (including mortgage subsidies)

40 0.1% 6 Direct transfers to vulnerable families for 6 months

48 0.1%

7 Support to agriculture 139 0.3% 7 Direct transfers to large families for 6 months

13 0.0%

8 Additional VAT refunds 600 1.2% 8 Direct transfers to disabled adults and children for 6 months

24 0.0%

9 GEL liquidity injection in commercial banks

600 1.2% 9 Subsidies for utility bills (electricity, natural gas) to households that consume < KV200 and 200m³ per month

170 0.3%

Total 1,889 3.8% Total 1,375 2.7%

Source: MOF Source: MOF

Georgia │ Economy

July 21, 2020

4

Figure 1: Real GDP growth, % change y/y Figure 2: Real GDP growth in 5M20, % change y/y

Source: Geostat, rapid estimates Source: Statistic offices

Figure 3: IMF’s GDP forecast for 2020 Figure 4: Georgia’s international reserves

Source: IMF, Latest-2020 Source: NBG

Figure 5: Goods exports Figure 6: Goods imports

Source: Geostat Source: Geostat

-16.6%

3.5%

4.6%

6.0%

5.1%

4.7%

5.0%

6.1%

5.8%

5.2%

5.7%

6.4%

3.8%

5.1%

2.2%

-2.7%

-13.5%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

Ja

n-1

9

Feb

-19

Mar-

19

Apr-

19

May-1

9

Ju

n-1

9

Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9

De

c-1

9

Ja

n-2

0

Feb

-20

Mar-

20

Apr-

20

May-2

0

-0.5%

-1.7% -1.8%

-3.0%

-3.9%

-5.4%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Kazakh

sta

n

Aze

rba

ijan

Bela

rus

Ru

ssia

Arm

en

ia

Ge

org

ia

-1.5%-2.2% -2.5%

-4.0%

-5.0%

-6.0%-6.6%

-7.7%

-10.2%

-4.9%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Arm

en

ia

Aze

rba

ijan

Kazakh

sta

n

Ge

org

ia

Turk

ey

Bela

rus

Ru

ssia

Ukra

ine

Euro

pe

Wo

rld

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Ja

n-1

4

Apr-

14

Aug

-14

No

v-1

4

Mar-

15

Ju

n-1

5

Oct-

15

Ja

n-1

6

May-1

6

Aug

-16

De

c-1

6

Mar-

17

Ju

l-17

Oct-

17

Feb

-18

May-1

8

Sep

-18

De

c-1

8

Apr-

19

Ju

l-19

No

v-1

9

Feb

-20

Ju

n-2

0

Gross international reserves, US$ bn

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-400

-300

-200

-100

0

100

200

300

400

500

Ja

n-1

8F

eb

-18

Mar-

18

Apr-

18

May-1

8Ju

n-1

8Ju

l-18

Aug

-18

Sep

-18

Oct-

18

No

v-1

8D

ec-1

8Ja

n-1

9F

eb

-19

Mar-

19

Apr-

19

May-1

9Ju

n-1

9Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9D

ec-1

9Ja

n-2

0F

eb

-20

Mar-

20

Apr-

20

May-2

0Ju

n-2

0

Exports, US$ mn % change y/y

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-800

-600

-400

-200

0

200

400

600

800

1,000

Ja

n-1

8F

eb

-18

Mar-

18

Apr-

18

May-1

8Ju

n-1

8Ju

l-18

Aug

-18

Sep

-18

Oct-

18

No

v-1

8D

ec-1

8Ja

n-1

9F

eb

-19

Mar-

19

Apr-

19

May-1

9Ju

n-1

9Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9D

ec-1

9Ja

n-2

0F

eb

-20

Mar-

20

Apr-

20

May-2

0Ju

n-2

0

Imports, US$ mn % change y/y

Georgia │ Economy

July 21, 2020

5

Figure 7: Remittances in Georgia, US$ mn Figure 8: Tourism revenues, US$ mn

Source: NBG Source: NBG

Figure 9: Currency vs. US$, (index, 1 Jan 2020 = 100) Figure 10: Inflation in Georgia

Source: Bloomberg Source: Geostat

Figure 11: Consolidated budget tax revenues, GEL mn Figure 12: Consolidated budget capex, GEL mn

Source: MOF Source: MOF

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-120

-80

-40

0

40

80

120

160

200

Ja

n-1

8F

eb

-18

Mar-

18

Apr-

18

May-1

8Ju

n-1

8Ju

l-18

Aug

-18

Sep

-18

Oct-

18

No

v-1

8D

ec-1

8Ja

n-1

9F

eb

-19

Mar-

19

Apr-

19

May-1

9Ju

n-1

9Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9D

ec-1

9Ja

n-2

0F

eb

-20

Mar-

20

Apr-

20

May-2

0Ju

n-2

0Remittances, US$ mn % change y/y

428

29

-26.1%

-96.7%-120%

-80%

-40%

0%

40%

80%

120%

-1,500

-1,000

-500

0

500

1,000

1,500

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

Tourism revenues, US$ mn % change y/y

95%

100%

105%

110%

115%

120%

125%

130%

135%

95%

100%

105%

110%

115%

120%

125%

130%

135%

1-J

an-2

09-J

an-2

017

-Jan-2

025

-Jan-2

02-F

eb-2

010

-Feb

-20

18

-Feb

-20

26

-Feb

-20

5-M

ar-

20

13

-Mar-

20

21

-Mar-

20

29

-Mar-

20

6-A

pr-

20

14

-Ap

r-20

22

-Ap

r-20

30

-Ap

r-20

8-M

ay-2

016

-May-2

024

-May-2

01-J

un-2

09-J

un-2

017

-Jun-2

025

-Jun-2

03-J

ul-20

11

-Jul-2

019

-Jul-2

0

TRYRUBAZNBYNAMDUAHKZTGEL

6.1%

6.2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%Ja

n-1

4

Apr-

14

Aug

-14

No

v-1

4

Mar-

15

Ju

n-1

5

Oct-

15

Ja

n-1

6

May-1

6

Aug

-16

De

c-1

6

Mar-

17

Ju

l-17

Oct-

17

Feb

-18

May-1

8

Sep

-18

De

c-1

8

Apr-

19

Ju

l-19

No

v-1

9

Feb

-20

Ju

n-2

0

Headline inflationCore (non-food, non-energy, non-tobacco)

+5.3%

+17.3%

+23.1%

-13.4%-17.0%

0

200

400

600

800

1,000

1,200

1,400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2018

2019

2020

% chage y/y, 2020

-21.1%+26.7%

+55.4%

+1.9%

-41.1%

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2018

2019

2020

% change y/y, 2020

Georgia │ Economy

July 21, 2020

6

Table 3: External flows: goods exports & imports, remittance and tourism revenues

1H17 1H18 1H19 1H20

Exports, US$ mn 1,244 1,605 1,789 1,503

% change y/y 30.9% 29.0% 11.5% -16.0%

Imports, US$ mn 3,621 4,513 4,389 3,550

% change y/y 9.1% 24.6% -2.7% -19.1%

Trade deficit, US$ mn -2,377 -2,908 -2,600 -2,047

% change y/y 0.3% 22.4% -10.6% -21.3%

Remittances inflows, US$ mn 633.4 746.5 806.1 769.0

% change y/y 20.6% 17.9% 8.0% -4.6%

Remittances outflows, US$ mn 96.6 110.1 108.8 106.1

% change y/y 4.4% 14.0% -1.1% -2.6%

Net Remittances, US$ mn 536.8 636.4 697.3 662.9

% change y/y 24.0% 18.6% 9.6% -4.9%

Tourism inflows, US$ mn 1,056 1,361 1,456 456.5

% change y/y 25.7% 28.9% 7.0% -68.6%

Tourism outflows, US$ mn 190.9 232.3 299.4 124.1

% change y/y 2.5% 21.7% 28.9% -58.5%

Net Tourism Revenues, US$ mn 865 1,128 1,157 332

% change y/y 32.2% 30.5% 2.5% -71.3%

Net external flows, US$ mn -975 -1,143 -746 -1,052

Source: NBG, Geostat, Galt & Taggart

Figure 13: NBG’s loans to banks Figure 14: Government deposits

Source: NBG Source: NBG, Treasury

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Ja

n-1

6

Mar-

16

Ju

n-1

6

Sep

-16

De

c-1

6

Mar-

17

Ju

n-1

7

Sep

-17

De

c-1

7

Mar-

18

Ju

n-1

8

Sep

-18

De

c-1

8

Mar-

19

Ju

n-1

9

Sep

-19

De

c-1

9

Mar-

20

Ju

n-2

0

0

500

1,000

1,500

2,000

2,500

3,000

Ja

n-1

6

Apr-

16

Ju

l-16

Sep

-16

De

c-1

6

Mar-

17

Ju

n-1

7

Sep

-17

De

c-1

7

Mar-

18

Ju

n-1

8

Sep

-18

De

c-1

8

Mar-

19

Ju

n-1

9

Sep

-19

De

c-1

9

Mar-

20

Ju

n-2

0

Government deposit at the NBG, GEL mn

Government deposit at commercial banks, GEL mn

Georgia │ Economy

July 21, 2020

7

Figure 15: Dollarization Figure 16: Non-performing loans, % of total loans

Source: NBG Source: NBG

Figure 17: Banking loans growth Figure 18: Mortgage loans

Source: NBG Source: NBG

Figure 19: Interest rates on loans to legal entities Figure 20: Interest rates on mortgage loans

Source: NBG Source: NBG

57.7%

64.1%

50%

55%

60%

65%

70%

75%

80%

50%

55%

60%

65%

70%

75%

80%

Ja

n-1

4

Apr-

14

Aug

-14

No

v-1

4

Mar-

15

Ju

n-1

5

Sep

-15

Ja

n-1

6

Apr-

16

Aug

-16

No

v-1

6

Mar-

17

Ju

n-1

7

Oct-

17

Ja

n-1

8

May-1

8

Aug

-18

De

c-1

8

Mar-

19

Ju

l-19

Oct-

19

Feb

-20

May-2

0Loan dollarization Deposit dollarization

2.3%

1%

2%

3%

4%

5%

6%

Ja

n-1

4

Apr-

14

Aug

-14

No

v-1

4

Mar-

15

Ju

n-1

5

Sep

-15

Ja

n-1

6

Apr-

16

Aug

-16

No

v-1

6

Mar-

17

Ju

n-1

7

Oct-

17

Ja

n-1

8

May-1

8

Aug

-18

De

c-1

8

Mar-

19

Ju

l-19

Oct-

19

Feb

-20

May-2

0

0%

10%

20%

30%

40%

50%

60%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

Ja

n-1

3

May-1

3

Sep

-13

Ja

n-1

4

May-1

4

Sep

-14

Ja

n-1

5

May-1

5

Sep

-15

Ja

n-1

6

May-1

6

Sep

-16

Ja

n-1

7

May-1

7

Sep

-17

Ja

n-1

8

May-1

8

Sep

-18

Ja

n-1

9

May-1

9

Sep

-19

Ja

n-2

0

May-2

0

GEL-denominated loans, % change y/y

FX-denominated loans, % change y/y (exc. FX effect)

Total loan portfolio, % change y/y (exc. FX effect)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

1

2

3

4

5

6

7

8

9

10Ja

n-1

8F

eb

-18

Mar-

18

Apr-

18

May-1

8Ju

n-1

8Ju

l-18

Aug

-18

Sep

-18

Oct-

18

No

v-1

8D

ec-1

8Ja

n-1

9F

eb

-19

Mar-

19

Apr-

19

May-1

9Ju

n-1

9Ju

l-19

Aug

-19

Sep

-19

Oct-

19

No

v-1

9D

ec-1

9Ja

n-2

0F

eb

-20

Mar-

20

Apr-

20

May-2

0

Mortgage loans (stock), GEL bn

Mortgage loans (stock), % change y/y (exc. FX effect)

12.62%

8.35%

5.72%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

No

v-1

5

Mar-

16

Ju

n-1

6

Oct-

16

Ja

n-1

7

Apr-

17

Aug

-17

No

v-1

7

Feb

-18

Ju

n-1

8

Sep

-18

De

c-1

8

Apr-

19

Ju

l-19

Oct-

19

Feb

-20

May-2

0

GEL US$ EURO

10.4%

6.1%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

Ju

n-1

4

Oct-

14

Ja

n-1

5

May-1

5

Aug

-15

No

v-1

5

Mar-

16

Ju

n-1

6

Sep

-16

Ja

n-1

7

Apr-

17

Ju

l-17

No

v-1

7

Feb

-18

May-1

8

Sep

-18

De

c-1

8

Mar-

19

Ju

l-19

Oct-

19

Ja

n-2

0

May-2

0

Local currency Foreign currency

Georgia │ Economy

July 21, 2020

8

Figure 21: Total COVID-19 cases per 100,000 persons

Source: Johns Hopkins, Worldometers Note: as of 7/17/2020 11:00 AM

1,147 1,116

695

520 506 431 403

356 318 266 258 257 241

152 131 104 70 38 25 6

0

200

400

600

800

1,000

1,200

Figure 22: COVID-19 statistics in Georgia, persons

Source: NCDC Note: as of 7/17/2020 11:00 AM

0

100

200

300

400

500

2/2

6/2

020

2/2

8/2

020

3/1

/202

0

3/3

/202

0

3/5

/202

0

3/7

/202

0

3/9

/202

0

3/1

1/2

020

3/1

3/2

020

3/1

5/2

020

3/1

7/2

020

3/1

9/2

020

3/2

1/2

020

3/2

3/2

020

3/2

5/2

020

3/2

7/2

020

3/2

9/2

020

3/3

1/2

020

4/2

/202

0

4/4

/202

0

4/6

/202

0

4/8

/202

0

4/1

0/2

020

4/1

2/2

020

4/1

4/2

020

4/1

6/2

020

4/1

8/2

020

4/2

0/2

020

Dayly new cases

Cumulative cases

Cumulative recoveries

Georgia │ Economy

July 21, 2020

9

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Head of Research Eva Bochorishvili | evabochorishvili@gt.ge

Head of Macroeconomic Analysis and Forecasting Lasha Kavtaradze | lashakavtaradze@gt.ge

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