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Economic Recovery Is Halted Due to 2nd Lockdown – Galt and Taggart

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BM.GE
23.12.20 14:45
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According to Georgia's leading investment bank, the Georgian economy was negatively affected by the COVID-19 pandemic this year because of the lockdown and halt in international tourism. "Based on preliminary estimates, the economy contracted by 5.8% in 9M20, with GDP contraction easing to 5.6% in 3Q from 13.2% decline in 2Q (notably, Geostat revised both 2Q and 3Q downwards.
 
GDP growth figures from 12.3% and 3.8% rapid estimates, respectively). However, rising COVID cases (for details, see our report on the healthcare sector) in recent months deteriorated sentiments, and this, along with post-election political uncertainty, weighed on GEL. With the absence of international tourism, hospitality and other tourism-related sectors were hit hard, but with lockdown measures re-imposed in other countries,
Georgia's exports recovery worsened in Oct-Nov 2020 also. Meanwhile, remittances continued strong growth supporting domestic demand along with sizable fiscal stimulus and implementation of public capex" - Galt and Taggart reported.
 
According to the analysis, the surge in COVID-19 cases prompted the government to reintroduce lockdown restrictions from 28 November 2020 till 31 January 2021. Galt and Taggart assess these restrictions as softer than the 1st lockdown when most of the economic activities were banned. "Notably, the number of new cases reduced since the 2nd week of December despite increased daily testing after 3 months of uninterrupted growth, and we expect a smooth decline in active cases to continue" - reads the report.
 
Further, taking into account downward revisions in 2Q and 3Q growth figures and the 2nd lockdown measures, Gal and Taggart expect economic contraction at 6% in 2020, revised downwards from its pre-lockdown forecast -5.1%. "We expect the economy to rebound to 5.0-5.5% growth in 2021, assuming tourism to recover to 50% of its 2019 level, which will support tourism-related sectors to turn into growth. In this regard, positive news on vaccine and the fact that over 70% of total arrivals travel by car to Georgia make us optimistic on tourism recovery
dynamics" - the investment bank reported.
 
Without a recovery in tourism, Galt and Taggart expect growth at around 3.7% in 2021. In this scenario, it projects economic activity to be positive in agriculture, mining, manufacturing, and construction, amongst others. We note that, with limited room for the rate cut in 2021, the fiscal policy will continue to have a central role in stabilizing the economy, with fiscal deficit set at 7.6% of GDP.
 
According to Gakt and Taggart, fiscal support is a significant driver of recovery in 2020, with targeted stimulus for affected businesses and households. "Notably, public capital expenditure increased by 14.8% y/y in 10M20, with 72.8% of the annual plan already disbursed. Notably, tax revenue performance was better-than-expected, and government revised 2020 tax revenue plan up by GEL 540mn to GEL 11.1bn. Importantly, the continuation of bank lending also supported the economic recovery, with credit growth at 11.4% y/y (+0.9% m/m) in October 2020 excluding FX effects" - reads the report.
 
Further, investment bank believes that the government's mortgage interest rate subsidy is also supportive of bank lending, as demand for new apartments rose. Galt and Taggart expects credit growth to continue in double digits in 2021, supported by growth rebound.