Baku, Azerbaijan, May 23
By Zulfiye Qurbanova - Trend:
Standard & Poor's Ratings Services affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Government of Georgia at 'BB-/B'. The outlook is stable.
The ratings on Georgia are constrained by its high external vulnerabilities, limited monetary flexibility, and low GDP per capita, S&P reported.
The ratings also reflect our view that while recent domestic uncertainties (following the 2012
elections and ensuing political tensions in 2013) have somewhat abated, wider regional uncertainties, linked to the crisis in Ukraine and slowdown in Russia, have increased. We expect that the contribution of domestic demand to growth will increase as confidence returns, but that the contribution from net exports will fall as a result of the unsupportive regional environment, according to the statement.
Despite this rebalancing of risk and some lingering uncertainty over the stability of the coalition government, we expect Georgia's longer term prospects to remain strong.
"We also expect that the government's policy direction will continue to support medium-term fiscal consolidation and that government debt levels will remain contained," the agency said.
In our view, slower economic growth over 2013 was closely linked to election-related uncertainties; consumption and investment remained subdued over the first three quarters before accelerating rapidly between September and year-end."
Fourth-quarter government expenditure was instrumental in achieving 3.3% real GDP growth, equal to one-third of the year's total expenditure at the general government level. The lifting of the Russian trade embargo also helped to boost exports over the second half of the year. In the short-to-medium term, we expect growth at below our previous forecasts for 2014 and 2015, before assuming a gradual improvement, albeit at relatively healthy rates.
S&P expects that the full impact of increased social spending will help 2014 growth, enhancing the carry-over effect from 2013. However, subdued post-election increases in private investment could constrain growth, potentially linked to lingering uncertainties around the new administration's policies on property rights and its aggressive stance toward key personnel in the previous government.
The effects of the ongoing crisis in Ukraine and slowdown in Russia are yet to become fully visible, and could well hamper export growth: together the two countries received 13% of Georgia's total exports in 2013, according to the statement.
Similarly, we expect FDI flows and remittances from the region to fall and for import demand
from Georgia to increase, pressuring the contribution from net exports to overall growth.
We expect increased import demand related to fiscal policy (where social spending increases the consumption of imported goods).
However, we anticipate subdued regional export demand to result in Georgia's current account deficit widening over the next couple of years, after halving in 2013. Over 2013, weak
domestic economic performance and flat FDI translated into substantially reduced import demand. At the same time, external demand for Georgian exports improved, partly on improved trade ties with Russia, according to the agency.
"This year and beyond, we forecast consumption-driven imports to accelerate, but regional external demand (particularly from Ukraine) to weaken and offset improvements in European demand," the agency said. "We expect Georgia's trade deficit to widen as a result. We think slower growth in key regional economies where much of the Georgian diaspora lives--Russia and Turkey--will result in only slightly lower remittances. However, this will also keep pressure on the current account deficit. Growth in FDI--of which we understand a significant portion is from expatriates located in the CIS--is also likely to remain subdued as a result."
Lower extra-regional investment flows, deterred by the ongoing Ukraine crisis and regional political uncertainty, will likely result in higher financing pressures. As a result, we expect Georgia's external indebtedness to increase over the medium term. Foreign exchange reserves currently cover approximately three months' of imports. Gross external financing needs remain high at over 110% of current account receipts (CARs) plus usable reserves, and we estimate Georgia is in a significant net external liability position of more than 100% of GDP or nearly 170% of CARs.
The Georgian lari depreciated some 7% between November 2013 and May 2014. This
was linked to the significant increase in fiscal expenditure over the fourth quarter of 2013; the depreciation of key trading partners' currencies; and excess liquidity in the domestic banking system, which creates demand for foreign currency. Over the same period, in order to smooth the related volatility, the National Bank of Georgia intervened on numerous occasions, with operations totaling some $1 billion in gross terms.
"However, we view the factors behind these pressures as temporary, although we expect the widening current account deficit to keep pressure on the lari," according to the statement. "That said, upside potential for both growth and external stability is linked to increased integration with the EU (with which an Association Agreement is likely this year). After its previous arrangement with the IMF expired in April this year, we also understand that the government is discussing a follow-on support arrangement."
Supporting the ratings, Georgia's fiscal performance remained contained over 2013, albeit partly through expenditure delays related to the presidential elections. We expect that the general government deficit will widen to nearly 4% of GDP over 2014 as the full raft of increased social expenditures is pushed through. Social spending is budgeted to increase by some 22% in 2014, linked to pensions for the elderly and the creation of universal health care. However, while we anticipate that financing these plans will significantly increase domestic debt issuance, we expect the government's debt burden will remain modest over the next few years at below 35% of GDP. Almost 72% of Georgia's debt is external, the vast majority at long maturity and on concessional terms from international organizations, according to the agency.
The domestic banking system remains receptive to government issuance as a result of excess liquidity linked to low consumption, but also continued deposit growth. Monetary policy transmission remains weak, however, and dollarization significant. Unlike the past few years of deflation, we expect inflationary trends to pick-up in line with the first few months of 2014 as growth improves. We also forecast credit demand to accelerate, albeit cautiously.
The stable outlook balances our expectations that Georgia's external position
will remain weak, but that growth prospects will stay relatively strong, the agency said.
"We expect that Georgia's dependence on external financing needs will remain significant, but that traditional financiers will continue to meet these needs," S&P said. "However, we could lower the ratings if Georgia's external financing needs increase materially higher than we currently expect, particularly if prospects for FDI deteriorate at the same time. We could also consider lowering the ratings if the performance of the regional economy materially reduces Georgia's longer term growth prospects or if political uncertainties linked to changes in policy cause us to reassess the predictability and transparency of policy. We could raise the ratings if growth accelerates materially faster than we currently expect while, at the same time, external vulnerabilities recede."
Improved prospects for investment and FDI, while maintaining fiscal discipline and policy continuity, could also see positive ratings pressure build.
The official exchange rate is 1,7628 GEL/USD on May 23.