TOPIC OF THE WEEK: Shall we brace for a currency crisis in Georgia?
For a week we tried to steer away from Georgia and discussed (last week) the medium-term budgetary envelope in Uzbekistan, but events in Georgia give us no respite. The very large decline in FX reserves in Georgia last month has raised fears about the sustainability of FX buffers in an environment in which political deadlock seems to be reigning over Tbilisi.
Our analysis suggests that a currency (and a larger BoP) crisis is Georgia is not imminent. While the CA position remains challenging, the flows that finance external gaps (CA and BoP), including remittances, revenues from tourism and FDI, continue apace. The lari itself is only very slightly overvalued as the REER has actually been steadily depreciating since mid-May last year. External public debt service appears also manageable in the next couple of quarters.
Still, there are events on the political horizon that may lead to renewed pressure on the currency. The election administration must announce the final results of the elections no later than November 21, and the first session of the Parliament must be called within 10 days of that. The opposition has said that it intends to boycott the convocation of Parliament and to renounce its MP seats. We thus expect some fresh protests in an attempt to physically prevent the GD MPs from entering the Parliament building.
In any case, an additional modest weakening of the lari to 2.8-2.9 USDGEL (2.73 now) towards year-end looks quite realistic as it would also usefully eliminate any remaining overvaluation of the currency against the backdrop of a still large CA deficit. We also don't think that such a degree of depreciation would have an adverse effect on inflation, which is running well below the 3 percent CPI target (0.3 percent YoY in Oct).
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