TOPIC OF THE WEEK: Georgia: Collateral benefit - A slide presentation
Georgia will benefit in the South Caucasus as an active bystander in the Armenia-Azerbaijan military conflict. Baku’s victory in the 3rd Karabakh war has elevated the status of the Azerbaijan-Turkey tandem, with which Tbilisi has a strategic relationship. In this week's report, which is a slide presentation, we argue that Georgia’s unique position in the region can be best characterized as one of collateral benefit.
The Turkish factor is extremely important for Georgia. Tbilisi considers Ankara its leading partner in the region, and this definition is formally enshrined in its Concept of National Security. It is hardly surprising that Georgia is the only member of the CCA space that has Turkey as its largest trading partner. Ankara, Baku and Tbilisi are also involved in many trilateral projects in various fields ranging from security to transport and communications. The Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus gas pipeline are only two of the examples of this critical geoeconomic cooperation. The larger affinity that Georgia has for Azerbaijan has been naturally enhanced by sympathies over Azerbaijan’s position regarding Nagorno Karabakh given Georgia’s own internal problems with Abkhazia and South Ossetia, which were lost during the 2008 war with Russia.
At the same time, Georgian authorities have never hidden their interest in maintaining good-neighborly relations with Armenia, although this is probably more important for Yerevan than for Tbilisi given the former’s critical dependence on the latter for transporting its goods north to Russia. Georgia can nevertheless play an important role as a mediator in the Armenia-Azerbaijan conflict and possibly even serve as a venue for signing a peace deal between the two.
The economy has taken somewhat of a breather from the two years (2021 and 2022) of sizzling double-digit GDP growth. It is, however, still going strong at 7.0 percent YoY over Jan-Aug. Preliminary data for 3Q shows a moderation of the pace of expansion, with the monthly GDP indicator growing at 5.5 percent and 5.8 percent YoY in Jul and Aug. We forecast full-year GDP growth at 6.0 percent and a slowdown to 4.5 percent in 2024.
Inflation has been very well behaved in recent months, running below the 3.0% CPI target, but higher energy prices and the lari’s depreciation will now start to provide tailwinds to price growth. We see inflation averaging 2.8 percent this year and 3.4 percent in 2024. The central bank transitioned to easing in 2Q23 and has now cut the policy rate by 100bpts to 10.0% from the peak of the cycle. We see more cuts along the way and forecast an end-2023 policy rate of 9.50% and an end-2024 policy rate of 8.0%.
The broadly benign underlying backdrop does not make us cavalier about existing risks. Institutional frictions have intensified in the runup to next year’s parliamentary elections. The ruling Georgian Dream has initiated impeachment procedures against the President, while the NBG’s decision not to honor sanctions imposed by the US on Georgia’s former Prosecutor General for allegedly having connections with Russian intelligence services has led to resignations from the NBG’s Governing Council. This has already weighed on the currency, prompting the central bank to intervene repeatedly in Sep/Oct to reduce the lari’s volatility. At the same time, we take exception to popular views that Georgian Dream has professed pro-Russian tendencies. The ruling party’s actions are better interpreted as having a distinct pro-Georgian flavor.
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