Georgian Economics - Coping with a Double Shock

Georgia has found itself in a vulnerable position. The economy will suffer from a drop in exports, remittances and tourism on the one hand and lockdown measures to fight Covid-19 on the other. GDP could shrink by as much as 4% this year, while the lari will remain weak. Georgia's relatively high external debt, its reliance on foreign funding and its moderate level of reserves (both FX and fiscal) mean that IMF aid will likely be necessary.Georgia stands to be one of the most affected countries in the region due to its significant reliance on remittances, tourism and capital inflows. This means that the Georgian economy will be particularly affected by the spread of the virus in the EU and neighboring countries. We expect the economy to contract by 4.2% in 2020. The government announced a nationwide quarantine that started March 31 and will be in place until the state of emergency ends on April 21. The measures include curfews, the stoppage of public transportation and a ban on large gatherings. Essential businesses remain open. In addition, Georgia faces a significant reduction in remittances from abroad. Remittances reached $1.7 bln last year, accounting for almost 10% of GDP. More than 65% of this came from the EU and Russia. The lockdowns, closed borders and quarantine measures across Europe and in Russia will likely result in a significant decline in the number of migrant workers and their incomes. We think remittances could tumble by as much as 20-30% y-o-y this year. Given that remittances are an important source of household income in Georgia, this decline will inevitably suppress real incomes and household consumption.Another important source of revenues is tourism, which had been growing quite rapidly in recent years. The number of tourists surged from 1.1 mln in 2007 to 7.7 mln last year. Tourism accounted for $3.4 bln in revenues last year, or 19% of GDP. Even if the domestic quarantine measures are lifted before the peak season gets underway in June (June-September accounts for 45% of visits), the sector could contract by as much as 40% this year.