Event

Foreign minister from 2004 to 2005, Salome Zurabishvili, backed by the ruling Georgian Dream party, won the last direct presidential election held in Georgia. Her victory was contested by her rival, Grigol Vashadze from the United National Movement, who called for early parliamentary elections ¬– initially scheduled in 2020 – and organised a peaceful demonstration on Sunday (3 December 2018). As a result, thousands took to the streets to protest against the election results.

Impact

Despite allegation of unfairness, election results are unlikely to trigger large unrest. Indeed, under the revised constitution, the presidential function is largely regarded as a ceremonial function while executive power is held by the Prime Minister and the government. The ruling Georgian Dream party, back by the Georgian billionaire Bidzina Ivanishvili, first won the parliamentary elections in 2012 and was re-elected in 2016.

Ever since the 2008 war with Russia, the approach towards Russia is high on the agenda. At the same time the Republic signed an Association Agreement with the EU in June 2014, which entered into force in July 2016, and the authorities tried to normalise relations with Russia. As a result, even if resumption of diplomatic relations remains unlikely, relations between Russia and Georgia have improved since 2012.

The macroeconomic outlook for this small open economy is generally favourable with strong real GDP growth (5% expected in 2018), modest inflation (close to the central bank’s 3% target), low fiscal deficit and moderate public debt (below 45% of GDP) and relatively stable exchange rate (which depreciated by less than 3% vàv the USD year-to-date). Thanks to a broadly flexible exchange rate, foreign exchange reserves are stable and cover around three months of imports. Short-term external debt is moderate and short-term political risk – which represents the liquidity – has been classified in category 3 since 2011 with a stable outlook.

However, external debt-to-GDP ratio remains very high (above 100% in 2017) and constitutes a key vulnerability factor even if a share of it consists in intercompany loans. Indeed, the high external indebtedness leaves the country vulnerable to changes in investors risk aversion. Moreover, poor infrastructures – which prevent Georgia from becoming a transit hub and a major tourism destination – , a limited production base – which results in high export concentration in metals, wine and nuts – and significant skill mismatches remain the main structural weaknesses.

Despite a strong growth in tourism, private transfers and goods exports, the current account deficit is large, at around 10% of GDP in 2018, and subject to considerable downside risks. Indeed, fuel imports represent around 15% of goods imports, thereby making the country vulnerable to oil prices evolution. Turkey is Georgia’s third largest destination for goods exports (Russia and Azerbaijan being the two firsts). Hence, the large depreciation of the Turkish lira (almost 30% vàv the USD year-to-date) and the lower Turkish domestic demand are likely to reduce goods exports to Turkey and tourism arrivals from Turkey (tourism is Georgia’s main source of current account receipts). The threat of US tariffs on automobile also represents a risk for the Caucasian Republic, as exports of cars and car parts represented around 2.5% of current account receipts in 2017. On the positive side, FDI inflows (mainly in the infrastructure, financial intermediation and energy sectors) are strong and finance a large part of the current account deficit.

Analyst: Pascaline della Faille – p.dellaFaille@credendo.com