Economy likely to prove resilient despite conflict
Overview:
The strong economic policies put in place since the "Rose Revolution" and a significant package of international aid will likely help Georgia recover relatively robustly from the recent military conflict over South Ossetia. The fighting with Russia certainly inflicted substantial damage to Georgia's economic infrastructure and raised perceived geo-political risks of investing in the Caucasus. Some have suggested the conflict will trigger a reappraisal of investments in Georgia and the region. But we believe this is unlikely for two reasons. The crisis is likely to give an added sense of urgency to the U.S and E.U. in securing non-Russian oil and gas supply routes. Georgia must remain central to this strategy given its critical position for transporting Caspian gas. The economic policy outlook in Georgia also remains very promising.
Recommendation:
The central bank has cut rates by 200 basis points to add liquidity to the financial sector in the aftermath of the military conflict. It has managed to keep the currency relatively stable but at the cost of reduced foreign exchange reserves. In the medium-term, growth will start to re-accelerate and the central bank will have to tighten monetary policy as large private capital inflows resume if it is to meet its inflation targets. But for now, private capital inflows will likely only return cautiously until the geo-political situation is perceived to have fully stabilised. We are neutral on Georgian local interest rates.