For the detailed rating report, click here.

Scope Ratings has today affirmed Georgia's BB long-term issuer and senior unsecured local- and foreign-currency ratings, along with the short-term issuer rating of S-3 in both local and foreign currency. All Outlooks are Stable.

Rating drivers

The BB rating reflects Georgia’s improving economic resilience underscored by structural reform measures, including strengthening institutional framework and business environment, the commitment to the Association Agreement with EU, and fiscal consolidation anchored around the IMF’s Extended Fund Facility (EFF) arrangement to create room for capital spending. The ratings are constrained by Georgia’s reliance on external financing and persistently large current account deficits, reflecting low domestic savings on the back of low per-capita income and narrow economic base, and high dollarization in the banking sector.

Georgia’s economic performance is gaining momentum. After two consecutive years of moderate, albeit resilient growth at close to 3% despite external shocks – well above most regional peers’ – real GDP growth accelerated to 5% in 2017, driven by robust external demand and private consumption. The growth has been broad-based across economic sectors. Besides trade and tourism services, growth has also been supported by construction and manufacturing.

Scope expects the Georgian economy to continue growing by 5% on average over the medium term due to strong demand from main trading partners, consumption and large investment projects. The government’s structural reform measures, as well as the improvement in Russia trade relations, and better economic ties with the EU and China should also support growth going forward. The downside risks to the medium-term economic outlook primarily stem from the external sector.

Scope views positively the government’s introduction in 2017 of its Four Point Reform Plan. The programme focuses on four areas: i) fostering job creation and productivity through education reform; ii) enhancing infrastructure projects via increased capital spending; ii) making public administration more efficient; and iv) further improving the business environment. The programme’s implementation is supported by the IMF’s Extended Fund Facility (EFF) arrangement amounting to USD 285.3m (around 2% of GDP) for 2017-20, which provides structural benchmarks and performance criteria. Georgia successfully completed the first review in December 2017 and reached a staff-level agreement on completing the second semi-annual review in April 2018.

Georgia’s structural reform is further underpinned by EU’s allocation of between EUR 371m-453m during 2017-20, as well as by the EUR 45m macro-financial assistance aimed at mitigating difficulties with the current account. Scope believes, that the commitment to the Association Agreement with the EU will mitigate Georgia’s external vulnerabilities through improved investment activity and export potential over the medium to long term.

The National Bank of Georgia (NBG) has overall been effective in both maintaining price stability over the past four years and preserving exchange rate flexibility in light of the high dollarisation in the banking sector and external exposures. In Scope’s view, the NBG’s gradual reduction of the inflation target is appropriate in the current economic setting.

Georgia is progressing with fiscal consolidation, with the headline deficit falling below 1% of GDP in 2017. The 2018 budget reflects the government’s plan to further increase capital outlay while keeping the current balance in check. Main consolidation measures include: i) reforming the remuneration system by containing wage growth; ii) privatising loss-making publicly owned corporations; iii) improving tax compliance; and iv) optimising social spending. Scope notes that the government is committed to allocating extra revenues primarily to high-priority investment projects.

According to the IMF, general government debt stood at 45% of GDP in 2017 and is forecasted to fall to 41% of GDP by 2023, driven by robust economic performance and budget consolidation measures. Still, the build-up of new liabilities or fiscal slippages may lead to higher indebtedness for the sovereign. Georgia’s debt is held largely by international financial institutions at favourable terms (around 60% of the stock), resulting in a low weighted average interest rate of 3.2% and a long average time to maturity of 7.3 years for the entire portfolio at the end of 2017.

Despite these strengths, Georgia faces a number of constraints. Georgia’s small open economy is vulnerable to external shocks and reliant on external financing, as reflected in persistently large current account deficits (on average 11.8% over the last decade) and high external debt (113% of GDP in 2017), owing to important structural challenges, including low domestic savings, narrow economic base and import-dependency. Additionally, low productivity levels curb per-capita income. Agriculture accounts for around 43% of the employment but produces less than 10% of GDP. These risks are partly mitigated by foreign direct investments financing almost three-quarters of the CA deficits on average for the last decade.

Georgia’s banking sector is susceptible to external shocks stemming from the high dollarisation in banks’ assets and liabilities. While dollarisation has been declining since 2017 due to measures taken by the NBG and the Government, including the improved access to long-term local currency resources, preferential treatment of the local currency under the new prudential regulations and subsidised conversion of US dollar-denominated mortgages, the foreign-currency exposure in loans and deposits (predominantly in US dollars and euros) remains elevated at 55% and 62.5% respectively as of Q1 2018.

Georgia’s fiscal outlook is constrained by generally weak tax revenues and is susceptible to the sizable contingent liabilities, estimated to be around 36% of GDP. Although the government is supporting the creation of a long-term institutional investor base for lari-denominated assets, the capital market remains underdeveloped constraining access to liquidity. The high proportion of foreign-exchange public debt exposes the budget to currency risk.

Georgia remains exposed to geopolitical risks of the unresolved conflict of South Ossetia and Abkhazia with Russia. The recent agreement between Russia and South Ossetia, which partly incorporates the South Ossetian military into the Russian armed forces, and the opening of a customs post in Abkhazia have strengthened Russia’s ties with both territories.

Scope currently expects no material escalations and views positively that Russia recently signed a contract on trade monitoring with a Swiss testing and inspection company, which enables the implementation of the 2011 Georgian-Russian agreement and creation of three “trade corridors” between Georgia and Russia, two of which pass through Abkhazia and South Ossetia. Georgia concluded a similar agreement in December 2017.

Core Variable 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 ‘BB’ (‘bb’) rating range for Georgia. This indicative rating range can be adjusted by up to three notches on the Qualitative Scorecard (QS) depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative findings.

For Georgia, the QS signals a relative credit strength for the following analytical category: i) growth potential of the economy. Relative credit weaknesses are signalled for: i) current-account vulnerability; ii) vulnerability to short-term external shocks; iii) geopolitical risks; and iv) financial imbalances and financial fragility.

The combined relative credit strengths and weaknesses indicate a sovereign rating of BB for Georgia.

The results have been discussed and confirmed by a rating committee.

For further details, please see Appendix 2 of the rating report.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that risks to the ratings remain broadly balanced.

The rating could be upgraded if: i) there is an important reduction in external imbalances, such as a material decrease in current account deficit, dollarization or increase in reserves; ii) the implementation of structural reforms improves productivity and labour market outcomes; and/or iii) fiscal consolidation continues in line with the EFF’s arrangement, improving fiscal sustainability.

Conversely, the rating could be downgraded if: i) there is a steep decline in capital inflows, weighing on growth; ii) public finances deteriorate due to a reversal in fiscal consolidation; and/or iii) heightened geopolitical risks or institutional challenges re-emerge.

Rating committee

The main points discussed by the rating committee were: i) Georgia’s growth outlook; ii) economic imbalances and structural reforms; iii) EU-Georgia Association Agreement; iv) fiscal consolidation measures and debt sustainability; v) external vulnerabilities and exposure to currency movement; vi) financial sector risks and performance; vii) recent geo-political developments; and viii) peer considerations.

Methodology

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

The historical default rates used by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 and 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 in which a rating may change within the next 12 to 18 months. A rating change is, however, not automatically a certainty.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Rating prepared by Levon Kameryan, Lead Analyst
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director
The ratings/outlook were first assigned by Scope on 30.06.2017.
The senior unsecured debt ratings as well as the short-term issuer ratings were first assigned by Scope on 30.06.2017.

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: National Bank of Georgia, National Statistics Office of Georgia, Ministry of Finance of Georgia, IMF, OECD, World Bank and Haver Analytics.
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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