Koba Gvenetadze, governor of the National Bank of Georgia, talks about Georgia’s impressive growth and its exposure to emerging-market risks and Turkey’s troubles.
Global Finance: The National Bank of Georgia revised its economic growth forecast for 2018 from 4.8% to 5.5%. Would you explain the bank’s rationale? What contributed to the growth?
Koba Gvenetadze: In the aftermath of the 2014-2015 regional crisis, economic recovery accelerated in Georgia along with the recovery in partner countries. Real economic growth in 2017 was higher than expected, at 5%, and—according to preliminary estimates—reached 5.7% in the first shalf of 2018. This is largely due to favorable trends externally and the recovery of domestic demand. Goods exports have been increasing at a pace of 28% in the first half of the year. External demand for services, particularly tourism, has also been strong.
In 2017, Georgia, with a population of 3.7 million people, hosted 6.5 million visitors. In the first seven months of 2018, tourists reached 3.8 million (15% annual growth), with 24% growth in tourism revenue. We al have positive dynamics in remittances from abroad fueling domestic demand, which was further supported by improved consumer and business sentiment and increases in lending. The improved economic environment raised foreign investors’ confidence in the Georgian economy, and stimulated inflows.
However, we are closely monitoring developments in the Turkish economy, as well as recent turbulence in global financial markets. The monetary policy of the National Bank of Georgia will stay focused on price stability (with a 3% inflation target), which, combined with the floating exchange-rate regime, has served the country well, especially during challenging periods.
GF: What does the National Bank of Georgia make of the crisis in Turkey? What impact could it have on Georgia?
Gvenetadze: Turkey is a large trading partner for Georgia, with a 17% share in goods imports and an 8% share in goods exports in 2017. A considerable portion of tourism revenues and remittance inflows come from Turkey. Economic difficulties in Turkey would reduce both foreign inflows and external demand for Georgian goods and services. On the other hand, the dynamics of the exchange rate and inflation in Turkey are also important. Furthermore, increased risks in the region would have an impact on risk premiums and, consequently, on foreign borrowing costs and capital inflows.
As of now, the Turkish lira has depreciated significantly against the Georgian lari and some other currencies, thus decreasing the competitiveness of Georgian exports. However, this is largely offset by increasing inflation in Turkey. Unless the situation in Turkey deteriorates further, we do not expect the negative impact on the Georgian economy to be significant.
GF: Countries with large current account deficits and weakening currencies are struggling to repay FX-denominated debt. To what extent are rising emerging-market risks likely to impact Georgia—and its monetary policy?
Gvenetadze: Georgia is a small open economy that is heavily dependent on imports and has historically run a high current account deficit. But the deficit (which has a high capital-goods component) is largely financed by high foreign direct inflows (FDI)—a relatively stable source of financing. For instance, during the past five years, the current account deficit on average stood at 10% of GDP, while FDI reached the same level. Currently, the level of external debt does not create constraints for monetary policy decision-making.
However, a high share of foreign-currency debt definitely poses risks of an increasing debt burden during depreciation periods. To address these risks, a number of measures are being carried out. We aim to integrate local market payment systems with international markets. Progress in capital market development is important to mobilize national currency resources not only domestically, but from abroad as well. It was a big leap when the European Bank for Reconstruction and Development issued lari-denominated eurobonds in 2017, the first case for local currency eurobonds in the region.
Financial-sector dollarization is another big concern, since high dollarization increases financial stability risks and limits monetary policy scope, especially in times of depreciation. Given that we stay committed to a floating exchange-rate regime, which has assisted the Georgian economy during past external shocks, it’s natural for the exchange rate to move in both directions. Therefore, we realized that it was important to start addressing dollarization issues and enhancing the resilience of the financial sector before a crisis hits and turbulence on foreign exchange markets increases: “The time to repair the roof is when the sun is shining.”