Fitch affirms Georgia at "BB", Outlook Stable

Fitch affirms Georgia at "BB", Outlook Stable

BAKU, Azerbaijan, Feb. 17

By Tamilla Mammadova – Trend:

Georgia's ratings are supported by governance and business environment indicators that are above the current medians of 'BB' category peers, and by a track record of macroeconomic resilience against regional shocks, Trend reports citing the Fitch Rating report.

According to the Fitch Ratings, Georgia's economy has been resilient against a testing external environment.

"Real Gross domestic product (GDP) growth in 2019 is estimated by Fitch at 5.2 percent, outperforming the agency's 4.3 percent projection, and up from 4.8 percent in 2018. The impact on Georgia's tourism sector (7.6 percent of GDP in 2018) from Russia's flight embargo (in place since June 2019) has been weaker-than-expected as higher visitor numbers from Turkey and the EU have offset the fall in visitors from Russia", said the Fitch Ratings.

As reported, total export growth remained positive, supported by a diverse base of export markets and depreciation of the Georgian lari. Meanwhile, revised national accounts data, starting from 2010, lifted nominal GDP by 8.6 percent as of 2018.

Economic growth in Georgia is forecast by Fitch to ease to 4.4 percent in 2020; just above the five-year average growth rate (4.2 percent) of "BB" category peers. The slower growth mainly reflects a weaker outlook for domestic demand due to a tighter monetary policy.

According to the Fitch, inflows of foreign direct investment (FDI) have slowed since mid-2018, partly due to the winding down of the TANAP gas pipeline project. The recent termination of contracts to construct the Anaklia deep-sea port project has led Fitch to lower its FDI projections.

"Headline inflation averaged 4.9 percent in 2019, reaching 7 percent in December 2019. Inflation in January 2020 eased slightly to 6.4 percent. Inflationary pressures have been mainly driven by higher food prices and a strong exchange rate pass-through as the lari depreciated against the USD 7.1 percent in 2019 (affected by domestic politics and the Russian flight ban). Georgia's real effective exchange rate (REER) depreciated 5.3 percent," said the Fitch.

As the Fitch noted, since September 2019, the National Bank of Georgia (NBG) has hiked its benchmark rate four times, and in keeping with its commitment towards maintaining exchange-rate flexibility, interventions in the foreign exchange market have been small.

"We forecast inflation to average 4.5 percent in 2020 and 3.2 percent in 2021. We expect that the NBG will likely maintain a proactive policy approach should further price pressures from lari depreciation arise," the Fitch said.

Georgia's current account deficit (CAD) in 2019 reached a historical low of 4.5 percent of GDP by Fitch estimates; largely on account of a smaller trade deficit as a result of weaker export growth and contraction in imports.

"We forecast the CAD to reach 4.1 percent in 2020 and 4.2 percent in 2021, still significantly wider than the median 2.6 percent of "BB" category peers. Financing of the CAD is expected to be covered by sustained net inflows of FDI, averaging 5 percent of GDP,” said the Fitch.

As reported, fiscal performance has remained broadly in line with IMF program targets.

"Georgia's fiscal deficit-to- GDP (including budget on-lending) is estimated to have reached 2.2 percent in 2019, within the government target of 2.3 percent, and below the median 2.7 percent deficit of "BB" category peers," said the Fitch.

Fitch considers that gains from improved revenue administration and increase in excise duties will help partially offset lower revenues from increased VAT refunds and lower grants. Meanwhile, government expenditure will increase in education, social benefits and pensions.

"Government debt of Georgia rose to 40.1 percent of GDP in 2019, as the impact from a weaker lari offset a narrowing of the primary fiscal deficit. However, sensitivity of government debt to exchange-rate shocks remains high given Georgia's large share of FC-denominated debt (78 percent)", added the FItch.

Georgia's banking sector is sound as reflected by Fitch's BSI score of "bb".

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Follow the author on Twitter: @Mila61979356

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