By Dennis Shen, Sovereign and Public Sector Ratings

Sustained geopolitical risks since Russia’s war on Ukraine challenge the long-run rating of Georgia, which we recently affirmed at BB, maintaining a Stable Outlook. After Ukraine, we assess Georgia as the most geopolitically at-risk nation among our 40 publicly-rated sovereign states. This is reflected by a specific one-notch exceptional downside adjustment for geopolitics in Georgia’s rating.

Several considerations underlie this assessment: First, growing pessimism around earlier prospects of a Ukrainian victory raises spill-over risks. Second, this is particularly a risk medium- to long-run for former republics of the Soviet Union – especially states holding a pro-Western orientation and actively pursuing EU and NATO accession such as Georgia, where accession is enshrined under the Constitution. Third, the parliament of disputed South Ossetia has mulled a referendum on joining Russia, aggravating relations.

In addition, the prospective re-election of Donald J. Trump in the United States could raise risks by later this year, given the isolationist foreign-policy stance of the former president.

Any pro-Western pivot in the future might abruptly elevate geopolitical risk

For Georgia, any medium-run pro-Western pivot could abruptly elevate geopolitical risk, especially given its geographical border with Russia. Russia’s 2008 invasion was intended to halt Georgia’s EU and NATO accession under ex-President Mikheil Saakashvili (Figure 1). Occupation of secessionist South Ossetia and Abkhazia is ongoing. Risks could escalate, for example, following future elections given the underlying pro-EU undertone and sentiment of a significant share of the population.

Closer links with the European Union as envisioned by conditional candidate status for accession announced in December last year may further stress relations with Russia, especially if Georgia makes material progress on meeting accession conditions.

Russia is unlikely to tolerate any nation of the European Union or NATO on the country’s southern rim. The incumbent Georgian Dream government has sought to pursue a more pro-Russian policy, partially as recognition of risks following Russia’s full-scale invasion of Ukraine. However, if Georgia edges politically nearer to Russia, this moves it further away from any EU accession, raises risk of secondary Western sanctions, enhances domestic polarisation (given the pro-Ukraine sentiments of citizens and the political opposition), and risks anti-democratic changes from Russian influence.

So, whatever way Georgia moves geopolitically within this turbulent environment will lead to challenges and associated risk for the BB rating.

Figure 1. World Bank Governance Indicators (Georgia) and Georgia and Ukraine geopolitical history
Governance indicators (Georgia), ranges from -2.5 (weak) to 2.5 (strong governance performance)

*Average of the following five World Bank Worldwide Governance Indicators: Control of Corruption, Voice and Accountability, Rule of Law, Government Effectiveness, Regulatory Quality. X-axis is centred at mid-point of each calendar year. Source: World Bank, Scope Ratings.

Domestic institutional risks weigh on credit outlook

As the Georgian Dream government seeks to square the circle – seeking closer ties for security reasons with the European Union and, in parallel, with Russia – an increasing influence of Russia within policy making elevates institutional challenges.

Recent elections have brought accusations of vote rigging. The October-2024 general elections are fast approaching, and a rift between the government and the nation’s pro-EU president Salomé Zourabichvili weighs on the coherence and credibility of EU-accession aims. Imprisoning pro-EU ex-President Saakashvili has attracted global disapproval even as a Kremlin-inspired foreign-agents law was dropped last minute only following meaningful protests.

From a credit perspective, Georgia’s historical advantages stemming from a strong relationship with the International Monetary Fund have recently waned. A precautionary USD 280m Stand-by Arrangement has been on hold since the middle of last year following questions concerning central-bank independence after changes shielding a pro-Russian former chief prosecutor from US sanctions.

Economic out-performance and fiscal trajectory support the credit ratings

Despite current geopolitical and rising institutional risks, recent exceptional economic out-performance continues to support Georgia’s sovereign credit rating. Contrary to most analysts’ expectations, the war in Ukraine has to-date significantly benefited Georgia economically since 2022 due to significant inflows of labour and skills from the warring nations as well as funds in the form of remittances, transit trade and direct investment. Following growth of an estimated 7.5% last year, we see real growth moderating to a still-strong 5.3% this year before converging on medium-run growth potential of 5% by next year.

Strong output growth and a track record of fiscal prudence are anchoring debt sustainability at this stage. Under our base-case scenario, public debt is expected to fall under 35% of GDP by 2028, from 39.4% last year and 60.2% at 2020 highs. Government debt has a favourable structure with a long average maturity, modest interest payments, and is primarily owed to the foreign official sector. Even as it reduces rates, the National Bank of Georgia continues its prudent and comparatively hawkish monetary policy, keeping inflation exceptionally low.

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