Georgia: Georgia Outlook for 2013-14

The country （Georgia） is situated in Southwestern Asia, bordering the Black Sea, between Turkey and Russia.It has borders with Armenia for 164km, Azerbaijan for 322km, Russia for 723km and Turkey for 252km. Land in Georgia is largely mountainous with Great Caucasus Mountains in the north and Lesser Caucasus Mountains in the south; Kolkhet'is Dablobi (Kolkhida Lowland) opens to the Black Sea in the west; Mtkvari River Basin in the east; good soils in river valley flood plains, foothills of Kolkhida Lowland.

The climate is warm and pleasant; Mediterranean-like on Black Sea coast.

Outlook for 2012-13

Mikheil Saakashvili, who was re-elected president in January 2008, will remain in power in 2012-13. Mr Saakashvili's popularity waned following his failed attempt in August 2008 to regain the breakaway province of South Ossetia by force, which led to a brief but damaging conflict with Russia.

We estimate that real GDP will expand by 4.6% in 2011. Increase will slow to 3.5% in 2012 as the deterioration in the world economic outlook, which began in the second half of 2011, weighs on Georgian economic activity. The economic outlook will improve in 2013, supported by the recovery in world conditions. The decline in world food and oil prices reduced inflationary pressures in the second half of 2011, and we estimate an average inflation rate of 8.5% for the full year. We estimate that the current-account deficit will shrink to about 9.6% of GDP in 2013, from 10.8% of GDP in 2011.

The political scene

Georgi Margvelashvili, a onetime mountain guide who forged a reputation in politics as a moderate voice of reason, won the presidential election in Georgia on Sunday with backing from the prime minister's ruling coalition.

Economic policy

In January-September the national budget recorded a surplus of Lari625.5m (US$351m), compared with a small deficit in the year-before period. A sharp 18.9% year-on-year rise in revenue in the first nine months, combined with the government's policy of fiscal restraint, supported the return to surplus.

The domestic economy

Real GDP expanded by 4.7% in the second quarter of 2011. Year-on-year increase was recorded in the majority of sectors, with the highest increase recorded in finance (29.1%) hotels and restaurants (11.6%), and manufacturing (11.1%). Increase in the agricultural sector as well picked up, to 4.9% year on year.

Foreign trade and payments

The current-account deficit stood at US$468m in the second quarter of 2011, an expansion from the US$362m deficit recorded in the first quarter of 2011. A larger trade deficit (US$734m) in the second quarter of 2011 was the primary factor driving the expansion of the deficit.

Outlook for 2013-14

    Giorgi Margvelashvili, the candidate of the ruling Georgian Dream coalition, is expected to win the presidential election in October 2013, but support has risen for David Bakradze, the candidate of the United National Movement.
    Relations with Russia, with which Georgia fought a brief conflict in August 2008 over the breakaway provinces of South Ossetia and Abkhazia, will improve gradually over the forecast period.
    Georgia will seek to strengthen ties with the West. The EU will accelerate association agreement negotiations, which should be completed in 2014.
    Political uncertainty will hold back growth in 2013, but a global improve‑ment and higher investment will support average growth of 3.9% in 2013-14.
    The current-account deficit will remain large throughout the forecast period, given weak export revenue. This represents a structural risk to the economy.
    Monetary policy will remain loose in 2013-14 as inflation is weak and credit growth comparatively low. However, high dollarisation and low business confidence will limit the impact of central bank policy on lending.

Review

    In late June parliament adopted a controversial land bill imposing a moratorium on the sale of agricultural land to foreigners until 2014.
    In July Mr Margvelashvili resigned as minister of education and science to focus on his presidential bid. He was replaced by Tamara Sanikidze.
    In early September the prime minister, Bidzina Ivanishvili, reiterated his intention to resign after the October election, increasing political uncertainty.
    Russia reopened the border to Georgian freight in August in a further sign of improving bilateral relations after the trade embargo was lifted.
    Flash estimates show year-on-year growth of just 1.4% in April-June, down from 2.4% in the first quarter. A contraction of 0.6% was recorded in June.
    The trade deficit narrowed by 13% in the first half of the year, driven by a 9% rise in exports following the relaxation of Russia's trade restrictions.
    Inflationary pressures remained weak, with consumer prices in August down 0.3% year on year owing to low public spending and cheaper imports.
    General government expenditure remained flat in nominal terms year on year during the first half, while revenue fell by 2% owing to lower output.