Scope Ratings AG today assigns the Republic of Georgia’s long-term foreign- and local-currency issuer rating at BB. The agency also assigns a short-term issuer rating of S-3 in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency is also rated at BB. All Outlooks are Stable.

Rating drivers

The BB rating is underpinned by Georgia’s economic resilience, moderate level of public debt, and the authorities’ commitment to structural reforms. However, these supportive factors are offset by significant challenges such as the country’s heavy reliance on external financing, large and persistent current-account deficit, highly contingent liabilities, and political risks. The Stable Outlook reflects Scope’s view that the country’s largely favourable fiscal metrics are likely to be maintained, even if growth were to slow down.

Growth in Georgia has been resilient, averaging 5.5% per year for the past decade. Looking forward, Scope expects growth to slow slightly to between 4% and 5%, driven by rising public investment and improving domestic and external demand. Growing economic ties with the EU, easing tensions with Russia and sound financial reforms should also support medium-term growth. Historically, Georgia has had modest levels of public debt, averaging 38% of GDP from 2010 to 2015. Scope expects a moderate rise in debt, driven by the large investment infrastructure programme, stabilising at around 46% going forward. Around 79% of total public debt is in foreign currency, most of which is owed to either multilateral or bilateral donors, a large portion on concessional terms.

The Georgian government is strongly committed to further fiscal consolidation. Scope expects the headline public balance to improve in both 2017 and 2018, due to infrastructure investments aimed at promoting trade and tourism while retaining medium-term fiscal sustainability. Georgia benefits from favourable governance indicators, a result of its strong commitment to successive market reforms that have enabled the country to transition from a command economy to a relatively dynamic developing one. Fiscal risks remain elevated, however, due to systematic weak tax revenues and fiscal slippages, as well as increased contingent liabilities due to increased use of private-public partnerships, power purchasing agreements and state-owned enterprises.

Georgian government intends to engage in a package of new structural reforms aimed at raising domestic savings, diversifying the economy, and reducing dollarization in the economy. The government expects these reforms to support medium-term growth prospects, improve living standards, and increase employment, but away from low value-adding activities (largely agriculture). This is critical to increasing domestic demand, wages and savings, while also reducing inequality. An agreement with the IMF in March 2017 underscores government commitment to fiscal consolidation and includes a general government budget deficit target of 3.1% of GDP by 2020 and placing a target of public debt as a percentage of GDP of 45%, aimed at achieving stronger and more inclusive growth, maintain fiscal sustainability, reduce external vulnerabilities, strengthen monetary and fiscal institutions, as well as improve financial and social safety nets.

Georgia’s high external debt and current-account deficit are key challenges for the rating. The heavy reliance on external financing exposes the country to external shocks; the low domestic savings rate increases the government’s need to secure external funding for investment and development. Gross and net external-debt ratios have increased significantly over the past 10 years, with the net international investment position reaching 121.6 % of GDP in 2016. Georgia has a large current-account deficit equivalent to 12.4% of GDP in 2016.

Looking forward, Scope expects the current-account deficit to gradually decline, and Georgian authorities to continue floating the currency in line with market forces to preserve competitiveness and strengthen the economy’s ability to withstand external shocks. Georgia’s free-trade agreements are extensive, but its export base is narrow and must be improved and expanded. In addition, the highly dollarized banking system means macro-prudential stability is exposed to external shocks, hindering the effectiveness of monetary and exchange rate policy. Nevertheless, Scope views the Georgian banking system as well capitalised and liquid.

Lastly, political risks remain high and continue to weigh on the rating. Domestic politics remain polarised, and the country’s geographic location and history as a major crossroad between Asia and Europe, while economically beneficial, places Georgia in a vulnerable geopolitical situation. The unresolved conflict in South Ossetia and Abkhazia with Russia, which led to armed conflict in 2008, underscores this ongoing challenge for the Georgian sovereign.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, signals an indicative (bbb) range on the long-term foreign currency issuer rating scale for Georgia. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.

For Georgia the following relative credit strengths were identified for the following analytical categories: 1) resilient economic performance; 2) moderate levels of public debt, and 3) the government commitment to structural reforms. However, these are outweighed by negative factors: 1) heavy reliance on external financing; 2) large and persistent current-account deficit; 3) a highly dollarized economy, and 4) elevated political risks.

Combined relative strengths and weaknesses lead the sovereign rating committee to adjust CVS results downwards arriving at the final BB issuer rating. For further details, please see the Appendix 2 of the rating report.

A rating committee discussed and confirmed these results.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that the government will keep to its fiscal consolidation programme and also continue to place the country’s debt on a firm downward trajectory over the medium term.

Potential upside rating factors are: i) a sustained reduction of external imbalances, while maintaining a stable macroeconomic environment, ii) stronger-than-anticipated economic growth leading to stronger fiscal consolidation and debt reduction, and iii) significant reduction contingent liabilities. Conversely, potential downside rating factors are: i) a steep decline or reversal of capital inflows, and ii) a decline in the commitment to fiscal consolidation iii) a political/geopolitical shock with a substantial negative impact on the macroeconomic and fiscal outlook.

For the detailed research report please click HERE.

Rating committee

The main points discussed during the rating committee were: (1) fiscal performance, (2) structural reforms effort, (3) rising contingent liabilities, (4) external position developments, (5) political developments and IMF agreement, (6) peers consideration.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sovereign Ratings” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by John Francis Opie, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings/outlook was first assigned by Scope on 30.06.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Georgia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation¹.

¹ Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Georgia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: IMF, World Bank, United Nations, NBG, and NSO.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
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