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Moody's expects Georgian economy to grow in 2021

Business Materials 21 September 2021 12:03 (UTC +04:00)

BAKU, Azerbaijan, Sept. 21

Tamilla Mammadova – Trend:

Moody's Investors Service ("Moody's") has affirmed the Government of Georgia's Ba2 local and foreign currency long-term issuer ratings and foreign currency senior unsecured rating, Trend reports via the Moody.

The outlook remains stable.

The rating affirmation and stable outlook are underpinned by the ongoing development of the fiscal and monetary institutions which has enabled an effective macroeconomic policy response to the pandemic-related downturn.

Moody's assumes that the recent political tensions will not derail the reform agenda.

As reported, Georgia's local and foreign currency country ceilings remain unchanged at Baa1 and Baa3, respectively. The four-notch gap between the local currency ceiling and the sovereign rating reflects a relatively small government footprint in the economy and strong institutions which are predictable and reliable in terms of policy action, notwithstanding a relatively high current account deficit and ongoing domestic political risks that point to some country risk.

The two-notch gap between the foreign currency ceiling and the local currency ceiling incorporates Georgia's external vulnerabilities including a relatively high current account deficit and still high levels of dollarization in the economy which increase transfer and convertibility risks.

Moody's expects the economy to grow by 7.3 percent in 2021, following a 6.2 percent contraction in 2020, driven by the collapse of the tourism sector and the domestic impact of lockdowns and movement restrictions in the wake of the pandemic. The recovery is underpinned by fiscal policy support to consumption in 2021 and signs of a steady rebound in regional tourism. Remittances and non-tourism exports, such as beverages, vehicles and machinery and equipment, have also demonstrated robust growth.

Moody's expects growth to be a potential of 4 - 5 percent in the next few years, driven by increased investment in productivity-enhancing infrastructure in agriculture and manufacturing, further increases in exports to more diversified markets including Europe, partly reflecting additions to Georgia's Free Trade Agreements, and as incomes continue to rise supporting consumer spending.

Overall, the marked and sustained economic recovery is supported by effective policy. While fiscal policy took up the main burden of supporting growth during 2020, monetary policy has tightened to contain inflation pressures driven by one-off fiscal policy changes and a sharp depreciation of the lari, the latter reflecting the collapse in Georgian economic activity. The recovery of the lari in the wake of policy tightening has helped insulate the still highly dollarized banking sector.

Moody's expects inflation to fall towards the National Bank of Georgia's (NBG) inflation target of 3 percent from 12.8 percent currently after temporary factors fade and tight monetary policy offsets commodity price and international supply constraint pressures.

The current account deficit will also begin to narrow from a peak of 12.5 percent of GDP in 2020 towards pre-pandemic levels of around 5 percent, like remittances and non-tourism exports grow solidly and the longer-term benefits of reforms are realized, including reform of the pension system to build domestic savings.

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