Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Georgia (Georgia)’s long-term local- and foreign-currency issuer and senior unsecured debt-category ratings at BB and revised associated Outlooks to Negative, from Stable. The short-term issuer ratings are affirmed at S-3 in local- and foreign-currency, maintaining Stable Outlooks.

The revision of the Outlook on Georgia’s BB long-term sovereign ratings to Negative from Stable considers rises of institutional, geopolitical and external-sector risk affecting the credit, reflecting a weakening of democratic institutions, rises of civil instability, increased sanctions risks, greater geopolitical sensitivities alongside weakened official reserves. This furthermore recognises the suspension of the nation’s IMF programme, adoption of the “foreign-agent law” early last year, and challenges for the legitimacy of recent parliamentary and presidential elections. The path forward presents contingent risks relevant for sovereign debt repayment under any escalation of political instability, geopolitical risk and/or sanctions.

The Outlook revision represents Scope’s updated assessments of the issuer under ‘ESG risk’ and ‘external economic risk’ categories of the sovereign rating methodology.

Download the rating report.

Key rating drivers

Weakening of democratic institutions, rises in civil instability, risk of escalating sanctions and political instability.

The Outlook change to Negative firstly considers the weakening of democratic institutions and the associated implications for the legitimacy of the government and efficacy of policy making. Challenges for Georgian democratic traditions and the pro-Russian leaning of the Georgian Dream (GD) government have furthermore seen greater cleavages within society and rises in civil instability.

Compared against the nation’s exemplary record of democratic transition since the Rose Revolution, Georgia has seen a reversal to democratic backsliding over the more recent years, accelerated by greater Russian influence within the ruling government. This institutional backpedalling has seen an expansion of State controls, infringements on civil society and the independent press – especially those linked to Western governments, contested elections, and increasing questions around the independence of the judiciary. The imprisonment of ex-Georgian President Mikheil Saakashvili, increasingly severe responses against pro-EU demonstrations and actions to eliminate the political opposition are further examples. Resultantly since 2014, Georgia’s ranking has dropped on the World Bank Worldwide Governance Indicators.

On 28 May 2024, the Georgian parliament voted to adopt the foreign-agent bill. The law paved the way for the repression of critical voices and limitations of free speech – supporting the ruling government’s re-election later the same year. In the elections late October, around 54% of the electorate cast their vote for Georgian Dream according to central election commission figures, corresponding to 89 of 150 parliamentary seats. Nevertheless, referencing the exit polls, which had suggested a majority favouring the four main opposition groups, opponents of GD argued the election had been manipulated. International observers highlighted shortcomings of the elections from an uneven campaign playing field to ballot-stuffing, bribery and pressure campaigns. Opposition members announced boycotts of their parliamentary mandates, calling on their supporters to demonstrate. Reports of Russian interference have exacerbated uncertainty around the results.

In addition, due to Georgia's transition to a fully parliamentary system after rules changes under GD, the re-election of the ruling party in parliamentary elections last year meant the parliament elected last month party loyalist Mikheil Kavelashvili as the nation’s President, forcing out the directly-elected pro-European President Salomé Zourabichvili. Zourabichvili has stated she remains the legitimate President of Georgia – escalating a constitutional crisis of competing claims within the divided nation.

Actions taken by authorities against street demonstrations have seen the allegations of the contravention of the freedom of peaceful assembly. After the decision of the European Council in December 2023 to grant Georgia candidate status – seeking to bring Georgia back to the West, this EU candidacy has been suspended since last summer. Most recently, the GD government ruled out talks around EU accession or accepting EU budgetary grants until earliest the end of 2028 – fuelling protests from pro-EU segments. According to opinion polling, over 80% of Georgians support EU membership.¹

Western sanctions against Georgia have to date been targeted and deliberately restrained. Under the gradual measures taken, the European Council has suspended payments under the European Peace Facility of EUR 30m for last year², and is contemplating further sanctions even though efforts are impeded by several Member States. The United States has sanctioned many Georgian-Dream officials, most recently party founder Bidzina Ivanishvili, family members of many officials and law-enforcement officers for the undermining of democracy. This has seen asset freezes in US jurisdictions and travel bans to the United States³, alongside the suspension of the strategic partnership with Georgia. The risk of further sanctions is high, and any severe escalation of sanctions and/or curtailment of access to Western financing can have direct effects on repayment risks.

The rise of geopolitical risks after Russia’s full-scale war on Ukraine.

The second driver of the Outlook change is geopolitical risks for Georgia after Russia’s full-scale war on neighbouring Ukraine. The increasing constraints on Ukraine’s financing of its war efforts against Russia, including increasing funding uncertainties after American and European elections, increase contingent risks for Georgia.

If a pro-West electorate were to force any future change of government and reset Georgia on its constitutionally-enshrined path of EU and NATO accession, this may provoke abrupt tensions with Russian authorities. The geopolitical risks for Georgia consider the land border with Russia, latent tensions around the separatist regions of Abkhazia and South Ossetia, and the spectre of re-escalation of conflict long run after the nation’s catastrophic 2008 war against Russia. The parliament of South Ossetia has mulled a referendum on joining Russia since March last year, aggravating relations. After Ukraine (long-term issuer rating in foreign currency in selective default), Georgia is assumed as the most geopolitically at-risk sovereign of 40 Scope-rated sovereign governments. The re-election of Donald Trump in the United States also increases geopolitical risk.

Increased external-sector risks given reduced reserves, exchange-rate volatility and curtailed access to the International Monetary Fund.

Finally, the political developments challenge the external sector – historically an economic vulnerability. Official reserves partially recovered to USD 4.4bn last month but remain off highs of August 2023 at USD 5.4bn as the central bank stepped into forex markets after the sharp sell-off around the date of the “foreign-agent” law passing last spring⁴ and again shortly ahead of 2024 elections. Reserves coverage of short-term external debt moderated to 0.99x, less than half 2021 peaks at 2.12x.

Georgia’s advantages from an historically strong relationship with the International Monetary Fund have furthermore faded. The USD 280m precautionary Stand-by Arrangement, agreed June 2022, has been on hold since June 2023 after questions surrounding the independence of the central bank arose following changes of compliance rules aimed at shielding a pro-Russian former chief prosecutor from American sanctions. As Georgia remains vulnerable to external crises due to the small size of the economy, elevated reliance on external financing and significant dollarisation, the curtailment of external-sector buffers and suspended access to lenders of last resort decrease resilience.

Credit strengths: declining government debt ratio, a strong government debt profile and strong recent growth.

Georgia’s BB long-term ratings are supported by moderate public debt and a declining sovereign debt trajectory.

The government’s track record of commitment to EU-mirrored fiscal rules serves as the anchor for medium-run debt sustainability. Scope sees the general government deficit staying roughly unchanged around 2.1% of GDP this year before averaging 2.1% of GDP over 2026-29, from an estimate of 2.0% last year. This is consistent with the general government debt ratio decreasing slightly from an estimate of 38.9% at end-2024 to 34.4% by end-2029. This declining debt trajectory under baseline scenarios is underpinned by strong forecast nominal growth and an historical commitment to fiscal prudence. In addition, above two-third of Georgian government debt is on concessional loan terms, due to the history of sound engagement with the IMF and other international concessional donor institutions and supporting a comparatively long debt maturity (averaging 7.5 years as of June 2024 despite having shortened over the recent years)⁵ and moderate interest-payment burden. 94% of Georgian external debt is not rateable and due to be repaid to the official sector. This strong government debt structure furthermore decreases the public sector balance sheet’s vulnerabilities to external-sector crises, especially relevant given that a significant share of central-government debt is denominated in foreign currency (above 70%).

Finally, the Georgian economy is anchored by strong growth potential estimated at 5% a year medium run. The economy has recently grown well above even this high trend rate, benefitting from strong services-sector exports, financial inflows and large-scale arrivals of skilled workers from Russia, Belarus and Ukraine after the escalation of the Ukraine war. In the aftermath of robust output growth of 10.6% in 2021, 11.0% in 2022, 7.5% in 2023 and an estimated 9.6% last year, growth is foreseen staying strong at 6.8% this year before moderating to 5.7% next year.

Inflation stayed below target last year, with headline inflation averaging 1.1% YoY in 2024 (and standing at 1.9% as of December last year). The National Bank of Georgia has announced cumulative official-rate cuts of 300bps since May 2023, all the while maintaining a prudently tight policy stance overall.

Rating-change drivers

The Negative Outlook represents the opinion that risks for the long-term ratings are skewed on the downside over the next 12 to 18 months.

The upside scenarios for the long-term ratings and/or Outlooks are (individually or collectively):

1. Institutional and democratic weakening is reversed, civil and political instability moderates, and/or risks of further sanctions are curtailed;
    
2. Geopolitical and security risks relevant for the nation are eased significantly; and/or
    
3. External-sector risks are curtailed, such as reductions of structural current-account deficits and/or the re-accrual of foreign-exchange reserves.

Conversely, the downside scenarios for the long-term ratings and/or Outlooks are (individually or collectively):

1. A weakening of democratic institutions and/or rise in civil instability undermines governability, elevating sanctions risks and/or increasing the risk of heightened political instability;
    
2. An escalation of geopolitical risks meaningfully elevates adverse long-run implications for the borrower;
    
3. External vulnerabilities were to rise, resulting in significant adverse effects for reserve adequacy and/or for the repayment of the external debt; and/or
    
4. The medium-run public-debt trajectory weakens, as an example, due to a looser commitment to budgetary discipline and/or weaker-than-foreseen nominal growth.

Sovereign and 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 Georgia. Under the methodology, the first indicative rating next receives: 1) no positive adjustment from the methodological reserve-currency adjustment; and 2) a one-notch negative adjustment from the model’s political-risk quantitative adjustment. On such basis, the final SQM quantitative rating is ‘bbb’ and next reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of the sovereign’s qualitative credit strengths or weaknesses compared against those of an SQM-assigned peer group of sovereign states.

Scope identified several relative credit weaknesses, representing the QS analytical categories: 1) ‘Macro-economic stability & sustainability’; 2) ‘Current account resilience’; 3) ‘Resilience to short-term external shocks’; and 4) ‘Governance factors’. Conversely, Scope identified a single QS category as being a relative credit strength against sovereign peers: 1) ‘Growth potential and outlook’. On aggregate, the QS generates a net one-notch negative adjustment for Georgia’s credit ratings.

In addition, a final two-notch extraordinary downside adjustment is applied to the long-term ratings, reflecting one notch for: 1) elevated geopolitical risks faced by the nation given geographical proximity to and a history of aggression from Russia alongside unsettled disputes over the separatist regions of South Ossetia and Abkhazia; and a second notch for: 2) heightened domestic institutional risks and the associated risks of sanctions, following the slippage in democratic norms, disputed elections late last year and heavy-handed responses against peaceful protestors.

These adjustments conclude in final BB long-term ratings on Georgia. A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings processes via 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 methodological 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 counter-measures such as reductions of air pollution and carbon emissions and the setting up of legislation and enforcement around waste management. CO₂-emissions intensity is moderate. However, energy is predominantly imported, observing natural gas and oil products making up more than two third of the aggregate energy supply. The 2030 climate-change strategy aims to curtail greenhouse-gas emissions to 35% below 1990 levels for core sectors.

Social factors considered by the methodology include the elevated poverty ratio – which nevertheless dropped to 15.6% by 2022, following a rise to 21.3% during the pandemic year of 2020. Elevated structural unemployment and a weak social safety net represent longer-run economic challenges. Historical net emigration observed the working-age population declining around 0.8% a year over the decade through 2021, although this has been temporarily significantly alleviated by skilled-labour inflows from Russia. The working-age population is forecast by the United Nations averaging no annual change between 2025-29.

The European Council granted Georgia EU candidate status in December 2023, but this status has since been suspended. The former High Representative of the EU for Foreign Affairs and Security Policy Josep Borrell assessed the foreign-agent law as being ‘incompatible with EU norms and values’, which would ‘jeopardise Georgia’s progress on the EU path’. Governance challenges are seen remaining a relevant rating concern for the foreseeable future, driving a ‘negative’ QS assessment on the ‘governance factors’ analytical sub-category.

Rating committee
The main points discussed by the rating committee were: i) 2024 elections; ii) demonstrations; iii) sanctions; iv) EU accession suspension; v) external sector; vi) IMF programme; vii) geopolitics; viii) growth; ix) public debt profile; and x) sovereign peers considerations.

Rating driver references
1. International Republican Institute (IRI)’s Center for Insights in Survey Research (CISR) – April 25, 2023
2. Fortune – 9 July 2024
3. U.S. Department of the State, Announcement of a Visa Restriction Policy for Undermining Democracy in Georgia and Comprehensive Review of All U.S.-Georgia Cooperation – May 23, 2024
4. National Bank of Georgia – National Bank of Georgia injects USD 60 million to stabilize currency market
5. Ministry of Finance of Georgia, Public Debt of Georgia Statistical Bulletin – June 2024

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 4.0), 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 Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings 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 not 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 Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 June 2017. The Ratings/Outlooks were last updated on 2 February 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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