According to TBC Research, fiscal stimulus remained strong in October with the budget deficit amounting to an estimated 200 mln. GEL (around 5% of monthly GDP). The fiscal stimulus appears to be even more sizeable than initially expected.
The higher fiscal stimulus was mostly channeled through infrastructural projects, as indicated by the sharp growth (3.2x YoY) of capital spending in October. Unlike the previous year when late December advanced payments were at a record high and positively impacted 2019 growth, from strong fiscal spending, it appears that this year advanced payments will be relatively limited.
The updated version of the 2020 budget pinpoints the fiscal deficit at 2.9%. Despite further orientation towards social spending, overall, the budget remains balanced from a macro perspective, with capital and current spending at 6.9% and 21.5% of GDP, respectively.
As for financing the deficit, it is expected that domestic and external financing will both be much higher; with net issuance of domestic debt at 2.1% of GDP compared to 1.7% in 2019, while external borrowing is also projected to rise from 0.8% of GDP in 2019 to 1.7% in 2020. At the same time, debt financing will be partly used to build up a buffer in the form of deposits in the National Bank, with a total expected amount of 700 mln. GEL (or 1.3% GDP).
According to the MoF, the primary reason for the creation of the buffer is the 500mln. USD Eurobond maturing in 2021, though it has not yet been decided whether the Eurobond will be repaid or refinanced. The lower than projected external financing of the deficit in 2020, particularly coupled with the same or higher level of domestic debt issuance, and not the accumulation of a buffer from the NBG, poses a risk to the GEL as a significant part of IFIs’ related project financing directly enters the FX market in the form of FX inflows.
Additionally, external financing converted into GEL at the NBG accrues international reserves and enables the central bank to intervene on the FX market.
