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Georgia's banking system remains large relative to size of its economy - Moody

Business Materials 15 April 2021 15:55 (UTC +04:00)
Georgia's banking system remains large relative to size of its economy - Moody

BAKU, Azerbaijan, April 15

Tamilla Mammadova – Trend:

Moody's assessment of Georgia's fiscal strength reflects the responsiveness of the lari - which is freely floated and has continued to experience trend depreciation - to economic and political developments, Trend reports via the Moody.

With 77 percent of government debt denominated in foreign currency in 2019, Georgia's debt burden and debt servicing costs are vulnerable to sudden changes in the exchange rate.

Moody also believes that Georgia is more exposed to fiscal pressures stemming from the coronavirus pandemic than other similarly rated sovereigns, due to the importance of tourism and other service industries to its economy and given the likely slower path to recovery of the former.

Moody's view of Georgia's susceptibility to event risk reflects banking sector risk and external vulnerabilities. Georgia's banking system is large relative to the size of its economy, with assets accounting for around 117 percent of GDP in 2020.

With foreign currency denominated deposits accounting for more than 60 percent of the total, funding for the system is vulnerable to exchange rate risk. Offsetting these risks, Georgia's banking sector, which is well-capitalized and highly profitable, enjoys superior management and regulatory oversight to similarly rated peers.

Moody's view of Georgia's external vulnerability risk, reflects Georgia's large current account deficits, averaging around 9 percent of GDP over 2015-2019.

"We expect that the government's policy reforms will continue to support economic growth and resilience, notwithstanding the severe impact of the coronavirus outbreak on short-term growth, in particular through greater diversification of economic activity over time. Ongoing efforts to raise domestic savings and investment efficiency will complement increased diversity in exports and export markets, in part reflecting the governments' logistics and infrastructure spending focus," the report said.

This will help foster an environment conducive to further economic and institutional reforms. These positive forces are balanced by still significant banking sector risk - stemming from high levels of dollarisation - and uncertainties around the extent to which the economy will see productivity gains in key sectors such as agriculture, which has failed to attract substantial foreign investment and remains dominated by subsistence producers.

Furthermore, despite rising savings, Georgia's structural current account deficit and very large net international liability position represent significant exposure for the sovereign to potential negative turns in external financing conditions.

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