Standard & Poor’s (S&P) Global Ratings affirmed its ‘BB-/B’ long- and short-term foreign and local currency sovereign credit ratings on the government of Georgia; the outlook is stable, the S&P said in a message.
Georgia’s creditworthiness is supported by the country’s reasonably resilient economic growth and the government’s relatively prudent fiscal position, with net general government debt below 40 percent of GDP.
“The ratings are primarily constrained by income levels–which remain low in a global comparison—and considerable balance of payments vulnerabilities, including significant import dependence, high current account deficits, and sizable external debt,” according to the S&P analysts. “We also believe that the ratings remain constrained by the limited monetary policy flexibility, given Georgia’s shallow domestic capital markets and high levels of dollarization.”
The agency doesn’t expect major changes in policy direction to follow in the parliamentary election aftermath in Georgia.
“We anticipate that the government will continue its efforts to focus more closely on integration with the EU, strengthening the business climate, and diversifying the economy, which includes attracting foreign direct investments in the priority sectors,” said the S&P experts. “Historically, the Georgian authorities have largely maintained reform focus and prudent public finances despite considerable challenges at times, including a brief war with Russia in 2008 and the transition of power in 2012.”
Georgia’s economic growth has so far remained rather resilient considering the weak performance of several regional trade partners, according to the agency.
“Preliminary official estimates suggest that real GDP grew by 2.6 percent in year-on-year terms over the nine months of 2016, which is broadly in line with our expectations. We expect headline growth of 2.8 percent this year followed by a gradual improvement toward a 5 percent growth rate in 2019,” said the agency. “The following factors underline this forecast: robust investment dynamics over the next two years, underpinned by a number of public and private projects, including in the energy and tourism sectors; relatively strong consumption performance supported by moderate inflation levels, more stable lari exchange rate, and recuperating domestic credit growth; strengthening export performance from 2017 as the government’s efforts to diversify Georgia’s exports bring some results, while the economies of regional trade partners, including Russia and Azerbaijan, return to growth.”
“We continue to see considerable downside risks to our growth projections, particularly if Georgia’s key trading partner performance is lower than we currently expect,” noted the experts.
Since a number of the country’s main trading partners are heavily reliant on oil exports, such a scenario could materialize if oil prices started to fall again, as they did at the beginning of 2016, said the S&P.
“We also see longer-term structural challenges for the Georgian economy. At present, the country remains highly reliant on imports, while its export basket is characterized by predominantly low value-added goods,” said the analysts. “We understand that there is substantial potential in developing the country’s hydroelectricity-generation, agricultural production, and tourism sectors. Although the government continues to target the development of these sectors, we believe this is a long process and that most benefits will likely materialize beyond our forecast horizon.”
“We could raise the ratings if growth materially exceeds our current forecasts or if we see significant improvements in the effectiveness of monetary policy that allows the authorities a wider arsenal of tools to smoothen cyclical economic shocks over the next 12 months,” noted the S&P experts.
The agency could also raise the ratings if Georgia’s institutional settings and policymaking effectiveness were to improve, according to the message.