20 Jul, 2020
Comparing the 2008 and 2020 Shocks from an International and Georgian Perspective
- The COVID-19 shock has triggered an unprecedented decline in economic growth and employment worldwide. However, the virus shock itself is an exogenous one. In particular, unlike during the period leading up to the 2008-09 crises, the buildup of fundamental imbalances, across a range of indicators, was far less perceptible, such as in output gaps, housing price bubbles, record high commodity prices, credit-to-GDP gaps and other indicators of health in the financial sector. On the other hand, some increase in sovereign and corporate debt, high stock market valuations and late-cycle indications in the US, raised the probability of a recession even before the COVID-19 shock.
- Despite high valuations, the US stock market quickly recovered from its lows at the end of March 2020, demonstrating much stronger performance compared to the 2008-09 crises. However, some of this recovery can be attributed to unprecedented monetary and fiscal stimulus with some risks of melt-up. Furthermore, considering the sectorial breakdown of equity indices, the pricing in certain structural shifts may be evident; the recovery was mainly driven by technology stocks, whereas in the most affected sectors, like HORECA and aviation, equity prices still remain subdued with only partial recovery. Though, even for those most affected by the pandemic, stock price performance was worse in 2008-09 than 2020, despite recently high valuations. Overall, equity markets are likely to expect a quick recovery from COVID-19 shocks. This is evident from the performance of advanced and emerging market equity indices, as well as bond spreads and the performance of commodity markets. Nevertheless, a quick “V” shaped recovery is not a baseline scenario for most projections in advanced economies, while a number of emerging economies, including Georgia and some of its main economic partners, are projected to recover relatively quickly.
- The global financial crisis and military conflict triggered the 2008-09 recession in Georgia, which prior to the crises was, as in other countries worldwide, already exhibiting signs of overheating. These warnings were apparent from the positive output gap, persistently high inflation, significant growth in consumption, rising CA deficit (although mainly driven by high FDI inflows), the housing price bubble and credit-to-GDP gap, unlike the 2020 shock. At the same time, like in 2008, the Georgian economy is not dependent on the production of investment goods, demand on which are most affected during times of crisis and take the longest to recover. On the contrary, Georgia’s exposure to tourism expanded substantially, while monetary, regulatory and fiscal stimulus were notable throughout both events.
- Banking system penetration has increased, though in line with its trend, and risk management practices have improved considerably. Confidence in the banking sector is also high currently. Furthermore, the dollarization level has decreased, and FX exposure has become more diversified with a growing share of the EUR, while the share of hedged borrowers has increased on the back of higher FX inflows to GDP. Similar to other nations, the country risk premium has recently increased to a much lesser extent. In addition, strong sales and high real estate price expectations before 2008 were more prevalent in the real sector. Unlike the pre-2008, the last decade has seen more frequent periods of distress, making the real and financial sector more cautious. For example, the durables goods sector was hardly hit in 2015-16, while 2019 was a shock for the real estate and tourism sectors due to lending regulations and Russia’s flight ban. Also, in recent years the GEL weakness impacted consumer and business confidence repeatedly.
- To summarize, compared to 2008-09, we believe there is a considerable chance of a quicker recovery and lower permanent losses from the recent crisis in Georgia. We are basing our judgement on an analysis of the fundamentals. Although high dependence on the tourism sector should be seen as a weakness, given that the virus will likely be contained in the coming quarters, or even later under the downside scenario, we still believe in the strong potential of the tourism sector in Georgia. Also, some potential structural changes in value chains globally, as well as increasing teleworking coupled with Georgia’s success in the fight against COVID-19 and the attractiveness of the country for non-residents may create additional opportunities.