Baku, Azerbaijan, Nov. 18
By Azad Hasanli - Trend:
Standard & Poor's Ratings Services affirmed its 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings on the Government of Georgia. The outlook is stable, SP said Nov. 17.
The ratings on Georgia are constrained by its high external vulnerabilities, limited monetary flexibility, and low GDP per capita.
"Domestic political uncertainties have recently increased and wider regional uncertainties persist, linked to the conflict in Ukraine and economic slowdown in Russia," the agency believes. "We continue to expect that domestic demand will drive growth, but as such, the growth outlook is now more susceptible to a slowdown."
Georgia's longer-term growth prospects are positive, and they support the ratings. A low government debt burden and controlled public finances also underpin the ratings.
The agency believes the signature of an EU Association Agreement in June and the commencement of a Deep and Comprehensive Free Trade Agreement (DCFTA) will continue to provide the main policy direction of the current and future governments.
Given the unsupportive regional environment, we anticipate that net exports' contribution to growth will remain negative over 2015-2017. The main growth engines--investment and consumption--are susceptible to confidence shocks stemming from the political environment, as seen in 2013 (presidential elections) and 2012 (parliamentary elections).
Georgia's economic performance rebounded through 2014, following the 15% decline in real investment growth during 2013. Real growth in industry and in the construction and manufacturing sectors has boosted volume GDP growth to 5% so far in 2014.
Moreover, at an average of nearly 4% between 2008 and 2014, Georgia's growth has been
resilient. We have not yet incorporated into our base-case a slowdown resulting from a potential political hiatus, although we may reduce our GDP forecast from the 5% we estimate for 2014. "We continue to see growth potential in the development of Georgia's energy and transport infrastructure and its agricultural sector, with an expanding export market provided by the DCFTA and the EU," the agency believes.
The return of economic confidence so far in 2014 is also visible in import growth, which is partly behind our expectation of a wider current account deficit this year (see table 1). Although offset to an extent by improving trade with Russia, Georgia has a weak export basket that has been affected by the conflict in Ukraine and the introduction of regulations in Azerbaijan that prevent the import of repaired cars over a certain age. Vehicle re-exports account for roughly 20% of Georgia's total exports, and exports to Ukraine have averaged 5.2% of total exports per month this year through September, versus an average of 6.7% per month during 2011 to 2013.
"We project that domestically driven import demand from infrastructure projects and private consumption will keep the current account deficit at levels similar to, or slightly lower than those in 2014," the agency believes. "However, foreign direct investment (FDI), a key financing item (and frequently emanating from Russia, Ukraine, and Turkey), could also be deterred by political uncertainty. If this occurs, we anticipate that although related import demand would drop in tandem, domestically driven imports would likely prove more troublesome to cut (especially in the public sector), thereby creating an external financing."
A recently signed stand-by agreement with the International Monetary Fund will be available, if needed, to support Georgia's reserve position, which remains low at less than three months of current account payments. Gross external financing needs remain high, at close to 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.
As budgeted, Georgia's fiscal deficit is likely to reach about 3.6% of GDP this year. Although revenues have increased more than growth, the government's approximate 12% increase in current expenditures to date in 2014 more than offsets this.
"We think the government will use some expenditure flexibility on its capital budget if revenues fall short of expectations, given that revenue increases are now linked to less certain growth," the agency believes. "Still, we expect the government will make some progress in its consolidation path and that its debt burden will remain relatively low, with net general government debt at about 30% of GDP."
The domestic banking system remains receptive to government issuance as a result of excess liquidity linked to low consumption and continued deposit growth. Monetary policy transmission remains weak, however, and dollarization significant. Contrasting with the past few years, inflationary trends have picked up, although we think inflation will remain contained at roughly 4.5% this year.
The National Bank of Georgia has remained ready to intervene in managing both depreciation and appreciation of the lari over 2013 and 2014.
Domestic demand for foreign currency and subdued foreign currency earnings underpin our
assumption of gradual depreciation.