Azerbaijan, Baku, 17 June / Trend A.Akhundov /
Standard & Poor's Credit Ratings Service affirmed the long- and short-term sovereign credit ratings of the government of Georgia on liabilities at 'BB-/ B' level. The rating changes forecast is 'Stable'. Assessment of transfer and conversion risk for Georgian non-sovereign borrowers is 'BB', Standard & Poor's declared in its statement issued on Monday.
"The ratings on Georgia reflect our view that the peaceful and democratic political transition underway in Georgia will support the medium-term stabilization of fiscal and external balance sheets and economic growth prospects. This is despite current political tensions, which have created some policy uncertainty and have probably contributed to the current economic slowdown. The ratings are constrained by Georgia's high external vulnerabilities, limited monetary flexibility, and low GDP per capita. These factors are partially offset by the country's strong economic growth prospects, moderate levels of government debt, and stabilizing government finances," the statement says.
Eight months ago, the coalition Georgian Dream government, led by Prime Minister Bidzina Ivanishvili, ousted President Mikheil Saakashvili's United National Movement (UNM). The government and opposition still appear to have an uneasy relationship. The government has outlined its agenda for Georgia to join European institutions such as the EU and NATO (North Atlantic Treaty Organization) and to improve trade relations with Russia. It has also committed to preserve previously adopted reforms, to strengthen the judiciary and property rights, and to target more inclusive growth, for example by supporting the agricultural sector, which employs nearly half the population. But the implementation of its strategy has led to uncertainty in the investor community because the scope and effect on the economy of some of the planned measures are not clear, the statement says.
Economic growth slowed to 1.7% in the first quarter of 2013, the slowest since 2009. Growth began to wane in the second half of 2012, largely because of a slowdown in private foreign and public investment. The contribution to GDP growth from real investment decreased to 5.5% in 2012 from an average of 8% over the previous two years, while consumption growth held up. According to the agency, political uncertainties before and after the elections contributed to that slowdown.
"We expect that post-election political activity will continue to weigh on growth until at least the second half of this year. Tensions between the new government and President Mikheil Saakashvili, whose final term ends this fall, have eased since the parliament adopted a constitutional amendment that makes it more difficult for the president to dismiss the parliament. Nevertheless, uncertainty remains regarding the government's broad economic strategy, specifically regarding planned changes to the labor code and competition legislation, health care reform, and the establishment of new investment funds," Standard and Poor's noted.
According to Standard and Poor's, growth should rise in the second half of the year if infrastructure projects which were temporarily suspended when the new government took office are resumed and the government's economic and investment plans become clearer. Given the late start for the capital expenditure (capex) projects, investigations into some key construction companies, and the government's commitment to increasing social expenditure, we expect investment to increase much more modestly in 2013 than the double-digit growth rates of the recent past. Investment is expected to remain at just over 36% of GDP. We estimate that real per capita GDP growth will slow to 3.5% in 2013, but then accelerate to average just over 5% per year over 2013-2016.
In 2012, Georgia financed the current account deficit of 11.5% of GDP predominantly with the Eurobond issuance of two state-owned enterprises and also, to a smaller degree, net foreign direct investment (FDI) and portfolio equity inflows. Georgia's net external liability position widened to almost 100% of GDP in 2012, and we expect it will widen further in 2013. However, about half of Georgia's external liabilities are related to FDI and portfolio equity flows, which are less burdensome than debt in most scenarios. The current account deficit had been successfully financed by FDI (around 70% of the CAD on average was financed by FDI from 2000-2011), but in 2012 net FDI dropped to 3.8% of GDP.
"In our view, the medium-term boost to current account receipts that we expect from energy exports, increased activity in the agricultural and tourism sectors, and the resumption of trade with Russia, is likely to have a more significant positive impact on Georgia's external balance sheet after 2015. The general government deficit narrowed to 2.9% of GDP in 2012 from 3.6% the previous year, primarily because of one-off revenues and the new government's suspension of capex after it took office in the fourth quarter. The government plans to increase social expenditure through higher pension payments and the implementation of a universal health care system, while maintaining a deficit of below 3% of GDP. In our view, given the slowdown in the economy and disinflation pressures, revenue is likely to underperform, which will make it difficult for the government to meet its fiscal targets. Offsetting this will be a reduction in capex. We estimate that the general government deficit will widen to 3.5% of GDP this year before narrowing again,"the statement says.
Bank claims on the private sector and nonfinancial public sector enterprises grew by 13% in 2012, down from 23% in 2011. The slowdown began in the second half of 2012, linked to an extent to political uncertainty, with large corporate borrowers reluctant to borrow or invest. However, with bank claims still comparatively low at about 35% of GDP, we expect credit growth to pick-up after the political environment stabilizes. The high level of dollarization in Georgia will continue to constrain monetary policy effectiveness.
The stable outlook on the ratings balances our view of Georgia's large net external liability position and dependence on external financing against its strong economic growth prospects and potential for improved policy effectiveness, provided that the political environment stabilizes.
"We might lower the ratings if the uncertainties and tension involved in the ongoing political transition drag on for longer than we expect, depressing economic growth, fiscal revenues, and FDI.
We might consider raising the ratings if the political transition continues smoothly, particularly if the presidential elections unfold in a free and fair manner and policy predictability and effectiveness do not deteriorate. Continued strong economic performance, propelled by domestic and foreign direct investment, further progress in consolidating public finances, and the stabilization of external balance sheets, could also support an upgrade," the statement says.