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Standard & Poor's Ratings

S&P affirms Long/Short-term Credit Ratings on Georgian Government

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 remains stable.

Georgia’s external position is weakening as a result of numerous external shocks, and S&P expects growth will remain low over 2016.

Georgia’s economy has grown at an average of nearly 6 percent per year for the past decade, which illustrates resilience, particularly given the 2008 conflict with Russia, one of its main economic partners, the report of S&P said. The ratings service believes Georgia’s longer-term growth prospects are positive and that the country will continue to pull in significant amounts of foreign direct investment (FDI), which supports the ratings.

At the same time it expects that the significant depreciation of the Georgian lari against the U.S. dollar will also worsen the banking sector’s asset quality (because 60 percent of system assets are denominated in foreign currency and the majority of borrowers earn in local currency) and lead to lower credit growth.

As a result, S&P has significantly lowered its growth assumptions for 2015 and 2016, and now expects real GDP growth will average 3 percent over 2015 to 2018, in comparison with 3.8 percent previously.

Standard & Poor’s Ratings Services expect that FDI will continue as a key external financing item and that the government will control public finances through 2016.

Georgia’s current account deficit will widen to about 11 percent of GDP by year-end 2015, with further downside potential if import growth doesn’t reduce faster than the 11 percent drop in the first half of 2015, according to the report. Data on goods exports over the first half of 2015 show a 24 percent decline in goods exports over the first half of 2014, and S&P assumesa 20 percent contraction over the full year.

Another key source of foreign currency earnings is remittances-mainly from Russia, but also Greece and Ukraine-which S&P expects to be 1-2 percent of GDP lower than the past fiveyear average of 9 percent.

However, S&P projects that regional growth will improve during 2016, alongside a slight increase in oil prices.

“Therefore, we view the likely marked contraction in export growth over 2015 to be temporary and think that the denominator effect on narrow net external debt from temporarily lower current account receipts will subside as import demand increases alongside regional growth,” S&P said. It also believes that the current International Monetary Fund (IMF) program would be expanded to provide extra external support if needed.

S&P views Georgia’s banking system as well capitalized and liquid. However, it anticipates that asset quality will deteriorate, linked to repayment difficulties for those borrowers that earn in local currency but hold U.S. dollar-denominated debt. Dollarization is high in Georgia, and approximately 60% of deposits are in foreign currency, S&P noted.

S&P could lower the ratings if Georgia’s external financing needs increase markedly more than it currently expects, thereby increasing external debt, particularly if prospects for FDI deteriorate at the same time.

The service could also consider lowering the ratings if domestic political instability materially reduces the predictability and coherence of policy-making and long-term growth prospects, or if the regional slowdown is prolonged.

S&P said that it could raise the ratings if external pressures subside and support a recovery in exports, leading to growth levels stronger than our current base-case estimates. At the same time, improved prospects for investment and FDI, while maintaining fiscal discipline and policy continuity, could also support a positive rating action.