Georgia Update - Looming Elections Add to Uncertainty from Pandemic

Georgia held its own during the first wave of Covid-19 but is now experiencing a significant increase in new cases during the second wave. The government appears reluctant to implement a full-scale lockdown as the economy is already battered and parliamentary elections are looming, but if the infection rate continues to rise, we would not rule out such a measure. The outcome to the elections is far from certain, as the polls indicate that none of the parties enjoys much popular support. The conflict in Nagorno-Karabakh and tense relations with Russia represent additional risks for the country. Georgia initially met with success in fighting the virus, registering the lowest infection rate in the FSU region during the first wave. However, the second wave, which began in mid-August, has proven to be much more severe, as the number of new cases surged from 20-30 per day at the beginning of August to 1,872 on October 26. The total number of cases climbed from 1,100 on August 1 to 30,300 as of October 26. The city of Tbilisi and the Imereti and Ajara regions have been declared "red zones," with restaurants and entertainment centers forced to close at 22:00, while across the country outdoor gatherings of more than 200 people have been prohibited since September 10 (with the exception of political rallies) and public indoor gatherings are limited to 10 people. However, the government has stopped short of introducing a lockdown, as the October 31 parliamentary elections are approaching. On October 22, the EU removed Georgia from its list of countries to which it is safe to travel due to the surge in new cases.Despite its relative initial success in fighting the virus during the first wave, Georgia has been one of the countries most affected by Covid-19 in the FSU region given its reliance on remittances, tourism and capital inflow. We project that GDP will drop 6.3% this year (it shrank 5.6% y-o-y in 8m20). To soften the blow, the government introduced a GEL3.4 bln (6.8% of GDP) fiscal package, which appears set to widen the budget deficit to 8% of GDP this year. Georgia has already secured almost $1.5 bln (9.2% of GDP) from IFIs, which should be enough to cover the 2020 budget and current account deficits. We expect GDP to rebound next year and grow 5% (see "International Aid to Help Georgia Through the Crisis").Georgia is heading into parliamentary elections with a weak economy and a rising infection rate. For the first time since Georgia gained independence in 1991, the ruling Georgian Dream party could remain in power for a third consecutive term. But while the party remains high up in the polls, there are many undecided voters.