TOPIC OF THE WEEK: Did Georgian Dream push its luck by suspending EU accession talks?
Just as the post-election environment was getting calmer and the opposition looked dejected and lost, the new government (and Georgian Dream) decided to let the genie out of the bottle by springing the surprise decision to suspend EU accession talks until 2028. This only invigorated the opposition, which found a fresh reason to challenge the ruling party on the streets as protests turned violent. Without a doubt, the decision to suspend talks, whatever the reasons, was a mistake that generated a response that Georgian Dream probably did not anticipate.
The similarities with Ukraine of 2013/2014 appear too obvious to ignore. At that time, President Viktor Yanukovych ordered the suspension of preparations for the pact between Kiev and Brussels after talks between the Russian and Ukrainian prime ministers. The passing of the so-called "dictatorship laws", which severely restricted freedom of speech and freedom of assembly, provided the spark that brought about Ukraine's Revolution of Dignity. At the same time, Georgian Dream seems to have studied carefully the experience of both Ukraine and Belarus in handling protests and implemented actions that may have brought the revolution genie back into the bottle. Not allowing the setting up of tent camps in the center of Tbilisi, conducting preventative searches of opposition parties and the arrests of opposition leaders, and closing shops that sell pyrotechnics have resulted in a sudden change in momentum whereby after 6 days of virtual street battles (Nov 28 to Dec 4th), the protests transitioned into a much calmer state, with protesters dancing and singing in the streets instead of employing fireworks at the policy. There has also been a decline in the number of protesters over the last two days.
Even more importantly, while there have been some defections from the ruling party (civil servants, ambassadors, etc), they have been too few and far between. In short, Georgian Dream continues to control the state machine, police and law enforcement, making it unlikely to see a revolution in the country that can bring down the ruling party. This is still not a foregone conclusion as the presidential elections scheduled for Dec 14th will surely offer another flashpoint for who ultimately has the upper hand at the current juncture. Salome Zurabishvili said she will not resign despite the expiration of her mandate, while the PM Kobakhidze responded that she will be forced to resign and leave the Presidential Palace.
So, even if the ruling party maintains its power (which is what we anticipate), Georgian society appears already split and destabilized.
There will be economic consequences, as well. The economy may be firing on all cylinders now, running at about 10% YoY in the first ten months of the year, but some of the risks that we identified when we assessed the probability of a currency crisis may manifest themselves next year as long as the post-election trajectory remains fraught. This is particularly relevant for FDI, which comes predominantly from the UK and EU. We anticipate a sharper slowdown in the economy than the 6.0% GDP growth forecast by the government, although an outright recession is very unlikely. At the same time, we do not expect that the CA deficit, which is currently running at 5.2% of GDP (as of 2Q24 on an 12mma basis), will widen, as any negative impulses from tourism will be offset by lower growth-driven imports. We had already forecast the currency weakening to 2.8-2.9 by the end of the year, and this happened early in the week, although the lari has now bounced back closer to its pre-election levels.
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