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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Georgia’s BB long-term issuer and senior unsecured debt ratings in local- and in foreign-currency, with Outlooks maintained at Stable. The short-term issuer ratings have been affirmed at S-3 in local- and in foreign-currency, with Outlooks remaining Stable.

Summary and Outlook

The affirmation of Georgia’s BB ratings accounts for the following credit strengths of the sovereign:

1. a resilient sovereign-debt profile and favourable government-debt trajectory, anchored respectively by access to concessional multilateral financing and a commitment to fiscal prudence;
    
2. a strong recovery and robust medium-run growth potential, underpinned by strong services-sector exports and foreign-direct-investment inflows.

The Stable Outlook reflects Scope’s opinion that risks to the ratings are balanced over the coming 12 to 18 months.

The ratings could be downgraded or the Outlooks revised to Negative if, individually or collectively: i) an escalation of geopolitical risks meaningfully elevates adverse long-run implications for the credit; ii) a rise of political risks and/or deterioration in institutions undermines the quality of governance; iii) external vulnerabilities were to re-rise, resulting in significant adverse effects as regards external debt sustainability and reserve adequacy; and/or iv) the medium-run public-debt trajectory weakens, as an example, due to a looser commitment to fiscal discipline and/or weaker-than-anticipated economic growth.

Conversely, the ratings/Outlooks could be upgraded if, individually or collectively: i) geopolitical and security risks relevant to the nation were to ease significantly; ii) the quality of institutions and democratic processes are strengthened; iii) external-sector risks are curtailed, such as a sustained reduction in current-account deficits and/or accrual of FX reserves; and/or iv) fiscal sustainability improves, due to further enhancements of the fiscal framework and/or additional declines in the public-debt ratio.

Rating rationale

First driver of the affirmation: favourable sovereign-debt profile and trajectory

Above two-thirds of Georgian government debt is on concessional interest-rate terms, reflecting a track record of sound engagement with the International Monetary Fund and other international donor institutions and supporting a comparatively long debt maturity (averaging 7.6 years as of H1 2023)¹ and moderate interest-payment burden. After rising to an estimated 5.3% last year, amid tight funding conditions, the Agency expects net interest payments as a share of general government revenue to remain stable over the forthcoming years, averaging 5.8% over 2024-28. A robust government-debt structure furthermore reduces the public sector balance sheet’s vulnerabilities to external crises, especially relevant in view of the significant share of central-government debt denominated in foreign currency (more than 70%). External-sector resilience was strengthened after the signing of an USD 280m Stand-by Arrangement with the IMF in June 2022 – announced by authorities as being used on precautionary basis only. However, the programme has been frozen since September 2023, due to concerns regarding central-bank independence following amendments to National Bank of Georgia law. This move highlights a persistence of governance challenges and adverse implications for policy making and macro-economic stability.

Nevertheless, authorities’ track records of commitment to fiscal prudence serves as an anchor for medium-run debt sustainability. Public debt is forecast to decline to around 33.9% of GDP by 2028, from around 39.4% last year, supported by strong nominal economic growth and modest primary fiscal deficits (forecast at 0.4% of GDP by 2028, from an estimate of 1.5% of GDP in 2023).

Second driver of the affirmation: strong recovery and robust economic-growth outlook

Following a strong post-pandemic recovery, in view of annual real economic-growth rates of above 10% during 2021-22, the Georgian economy maintained strong recovery momentum last year. Despite uncertainties associated with escalation of Russia’s war on Ukraine due to Georgia’s trade linkages with the warring nations, Georgia has weathered the crisis exceptionally well and benefitted economically. This resilience partially reflects favourable spill-over from significant migrant inflows from Russia, Belarus and Ukraine alongside a surge of remittances inflows and transit trade. Such flows have bolstered domestic demand and strengthened earlier the lari. Price pressures have decelerated, with monthly headline inflation averaging 2.5% year-on-year last year, after 11.9% in 2022, amid lower energy and commodity prices, more-favourable base effects, lari appreciation and tightened financing conditions. The National Bank of Georgia has more recently adopted rate cuts of 200bps since May 2023 while nevertheless sustaining a tight aggregate monetary policy (official rate at 9.0%). After an estimate of 7.0% last year, real growth is seen moderating to 5.3% this year, before converging on a medium-run rate of growth potential of 5% by next year.

Georgia’s strong medium-run growth is supported by an expectation of robust tourism-services exports and sturdy foreign-direct-investment (FDI) inflows. After recovering to 8.4% of GDP during 2022 (from 2020 lows of 3.8% of GDP), FDI inflows moderated to 5.7% during the year to Q3 2023. Scope expects FDI flows to stay robust, despite uncertainties associated with domestic politics, including forthcoming elections by the autumn of this year.

Rating challenges: Geopolitical risks, institutional challenges, and external-sector risk

Georgia’s BB long-term credit ratings remain constrained by the following credit challenges: i) sustained geopolitical risks, heightened since Russia’s war on Ukraine; ii) domestic institutional risks and tensions, democratic backsliding, and elevated political polarisation, reflecting diverging preferences among political groups and society for pursuing closer alignment either with the European Union or with Russia, in turn interacting with geopolitical risks relevant to the sovereign; and iii) a vulnerability to external crises due to the small size of the domestic economy, elevated reliance on external financing and dollarisation.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘bbb’ for the Republic of Georgia. Under Scope’s updated sovereign methodology, this indicative rating receives: i) no positive adjustment from the methodological reserve-currency adjustment; and ii) a one-notch negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘bbb-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Georgia’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following QS relative credit strengths for the Georgian sovereign: i) growth potential and outlook; and ii) fiscal policy framework. Conversely, the following credit weaknesses have been identified in the QS relative to Georgia’s sovereign peers: i) macro-economic stability and sustainability; ii) current account resilience; iii) resilience to short-term external shocks; and iv) governance factors.

On aggregate, the QS generates a further one-notch negative adjustment for Georgia’s credit ratings. Finally, Scope adopted an extraordinary negative adjustment of one notch for the ratings, accounting for vulnerabilities related to geopolitical risks faced by Georgia, given geographical proximity with and a history of aggression from Russia and unsettled disputes over the separatist regions of South Ossetia and Abkhazia. The above results in final BB long-term ratings on Georgia.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Georgia is exposed to meaningful environmental risks, associated with elevated air pollution in the main cities, illegal logging and cattle grazing in protected areas. This is partially mitigated by coordinated policy countermeasures such as reductions of air pollution and carbon emissions and setting-up of legislation and enforcement around waste management. CO₂-emissions intensity is moderate. However, energy is predominantly imported, seeing natural gas and oil products making up more than two thirds of the energy supply. The 2030 climate-change strategy aims to curtail greenhouse-gas emissions to 35% under 1990 levels for the core sectors.

Social factors considered under the methodology include elevated poverty ratios of the economy – declining to 15.6% in 2022, following a rise to 21.3% in 2020. Elevated structural unemployment and a weak social safety net reflect longer-run economic challenges. Historical net emigration has seen the working-age population declining around 0.7% a year over the past decade, although this has been temporarily significantly alleviated by significant skilled-labour inflows from Russia.

The European Council constructively granted Georgia membership candidate status during December 2023, on the understanding that conditions defined by the European Commission recommendation of 8 November 2023 would be met². These include reforms aimed at strengthening the independence of the judiciary, tackling persistent corruption and “de-oligarchisation”³. Scope expects implementation of said policies might prove challenging, in view of a recent trend of significant divisions between the ruling Georgian Dream and the largest opposition United National Movement. A January-2024 report from the Eastern Partnership Civil Society Forum found Georgia had lost ground in its processes toward European integration due to ‘serious backsliding in fundamental freedoms, democracy and governance-related indicators’⁴. Governance challenges are expected to stay a relevant rating concern over the foreseeable future, partially driving a ‘negative’ analyst QS assessment on the ‘governance factors’ category.

Rating committee
The main points discussed by the rating committee were: i) external-sector developments; ii) debt and fiscal trajectories; iii) economic developments and outlook; iv) institutional and political risks; v) geopolitics; and vi) sovereign peers considerations.

Rating driver references
1. Ministry of Finance of Georgia, Public Sector Debt Statistical Bulletin – June 2023
2. European Council conclusions, 14 and 15 December 2023
3. European Commission, Georgia Report 2023
4. The Eastern Partnership Civil Society Forum, 2023 Eastern Partnership Index

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation     YES
With Access to Internal Documents                                  NO
With Access to Management                                          YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 June 2017. The Credit Ratings/Outlooks were last updated on 27 January 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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