Baku, Azerbaijan, Oct. 20
By Azad Hasanli - Trend:
Fitch Ratings has revised the Outlook on Georgia's Long-term foreign and local currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the IDRs at 'BB-'.
The issue ratings on Georgia's senior unsecured foreign and local currency bonds have also been affirmed at 'BB-'. The Country Ceiling has been affirmed at 'BB' and the Short-term foreign currency IDR at 'B'.
"Georgia continues to demonstrate a strong commitment to economic and structural reforms, guided by a succession of IMF programmes including a three-year standby arrangement signed in July," a statement says. "Georgia has also signed an Association Agreement with the EU, which entails a Deep and Comprehensive Free Trade Area (DCFTA)."
Easier access to EU markets should help to boost Georgia's attractiveness as an investment location over the medium to long term.
Georgia's business environment compares favourably with rating peers, as illustrated by the World Bank's ease of doing business indicators, Fitch said.
Economic progress has been matched by growing political stability.
"Georgia held its third consecutive round of elections in July, which marked the completion of the peaceful transfer of power in a transparent manner from the previous government," a statement says. "International observers have acknowledged the strengthening of institutions. The stabilisation and maturing of the domestic political scene, coupled with a decline in corruption has reinforced business confidence."
Economic growth has rebounded and is expected to continue to fluctuate around 5% over the coming years on the back of continuous investment and export growth, Fitch said.
"Fitch's forecasts are still relatively cautious on the potential impact of DCFTA," a statement says. "The medium to long-term forecast is subject to upside risks linked to potential foreign and domestically financed projects, which could lift growth numbers upwards. A lack of skilled labour will weigh on growth prospects in the medium to long term, but could be compensated by inflows of skilled migrants as has been the case in previous years."
The government is expected to maintain its prudent fiscal policy, so that debt should peak below the 40% limit by 2016. As a result of the authorities' ambition to catch up on delayed investments in 2013, the fiscal deficit is expected to rise to about 3.6% of GDP in 2014, but should decline from 2015 onwards. Although a large proportion of public debt is foreign currency denominated, the high share of concessional debt protects the sovereign balance sheet from the impact of exchange rate fluctuations.
Tentative improvements of the bilateral relationship with Russia were illustrated by Russia's modest response to Georgia's signature of the DCFTA.
Russia's economic leverage in Georgia is still quite low, as it accounted for less than 10% of Georgia exports in 1H14 and remittance flows have proven resilient. The repercussions of the crisis in Ukraine on Georgia have been marginal to date, a statement says.
The external sector remains Georgia's main weakness.
Given its large current account deficit (CAD) and high external debt, Georgia remains vulnerable to a sudden stop in external funding. A widening of the CAD is expected in 2014, to about 8.7% of GDP. Georgia's current IMF programme is geared partly towards a stabilisation of external liabilities in the context of ongoing reform and policy adjustment.
GDP per capita remains particularly low compared with peers, but could be lifted slightly upwards by a new census that is expected to revise down the current estimate of the population, Fitch said.
The banking system is well-capitalised and liquid. Credit growth is fairly rapid, averaging about 19% over 2009-2013, but the level of leverage in the economy is moderate at around 39% of GDP. However, the level of dollarisation remains high at about 60% of loans and deposits, although these levels have fallen from in excess of 70% in 2009.
The main factors that could lead to an upgrade are:
- A continuation of strong and sustainable GDP growth combined with fiscal discipline.
- A stabilisation of the net external debt ratio, accompanied by continuing export growth and strong FDI inflows.
- A further and significant reduction in the dollarisation ratio.
The current rating Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to a downgrade. However the following factors could lead to a negative rating action:
- Renewed pressure on reserves and the exchange rate, brought about by a widening in the CAD combined with a fall in capital inflows.
- A departure from prudent fiscal and monetary policymaking.
- A souring of the domestic or regional political climate.
Fitch assumes that the government will maintain its medium-term ambition to keep fiscal deficit below 3% of GDP, stabilising the gross general government debt ratio below 40% of GDP.
Fitch does not expect a deterioration of bilateral relations with Russia and expects the lifting of trade barriers to be maintained.
Fitch assumes political risks, regionally or domestically, will not escalate to a level that would materially affect Georgia.