Economic resilience tested by successive crises
Overview:
Georgia has rightly been regarded as one of the leading economic reformers of the Former Soviet Union since the Rose Revolution in 2003. However, it endured a torrid 2008, just starting to recover from the August war with Russia and then having to endure the onset of the more severe leg of the global financial crisis shortly after. Policy responses to both crises appear to have been appropriate and the Donors’ Conference held last October was very successful. Nevertheless, it will be some time before the authorities’ strong policy response will bear fruit in terms of a return to strong investment inflows and high rates of economic growth. The domestic political scene has changed since the war, with the Saakashvilli government facing more concerted opposition but still likely to retain power for the foreseeable future.
Recommendations:
The authorities responded to the August conflict by cutting interest rates and maintaining the stability of the Lari. A temporary reduction in foreign exchange reserves was offset by the approval of a large international financial package. But the onset of global economic turmoil has proved an even larger and additional challenge. The worsening outlook for the balance of payments has persuaded the authorities that the Lari had to be devalued in November. While medium-term economic prospects remain positive the short-term outlook is one of low interest rates, and the likelihood of a further downward currency adjustment. We are therefore underweight on Georgian local currency instruments.