Fitch Affirms Georgia at 'B+'; Off RWN; Outlook Stable
Tuesday, September 1
"The inflow of massive international financial assistance is supporting Georgia's economy and creditworthiness following the war with Russia in August 2008 and the global financial crisis, while the risk of a third shock of major domestic political instability has receded as mass opposition demonstrations have dissipated," says Edward Parker, Head of Emerging Europe in Fitch's Sovereigns team.
Negative shocks to confidence, workers remittances, metal prices, foreign direct investment and other private sector capital inflows have had a severe impact on the Georgian economy, which was left exposed by its large current account deficit (CAD) and booming banking sector. However, a USD1.2bn IMF programme and a USD4.5bn international aid package, mainly covering 2008-2011, (equivalent to 50% of 2009 GDP) are financing the budget and CAD in the near term, bolstering foreign exchange reserves (FXR), underpinning the financial sector and limiting the scale of the recession. Fitch forecasts GDP will contract by 4% in 2009, less than in many regional peers, before growing 2% in 2010.
However, Georgia faces significant challenges. The government has revised its budget deficit target to 9.4% of GDP this year and will need to enact painful fiscal consolidation over the medium term to restore public finances to a sustainable path. Fitch forecasts that net government debt will rise to 38% of GDP at end-2011 from 22% at end-2008. Nevertheless, this would still leave it below the 10-year 'B' range median, and much of Georgia's debt is concessional, with long maturities and low interest rates.
Fitch forecasts a sizeable CAD of 16% of GDP this year, albeit down from 23% of GDP in 2008, leaving the country dependent on external financing. Gross and net external debt ratios are well above 'B' range medians. The tradeable sector is narrow and exposed to shocks. Georgia needs to rebalance its economy, correct the twin deficits and secure a resumption of private capital inflows before international aid tapers off and debt repayments step up sharply in 2012-14.
The banking sector has a high loan-to-deposit ratio, saw a fall in deposits during the crisis and is suffering a deterioration in asset quality, but capitalisation is high. The system's high dollarisation renders macro-economic and financial stability vulnerable to shocks and impairs the effectiveness of monetary policy. Encouragingly, the National Bank of Georgia has curtailed its FX interventions, though FX pressures could re-emerge at some point in the future.
Political risk is relatively high and a material constraint on the ratings. Fitch does not anticipate renewed military conflict with Russia or a major increase in domestic political instability, but risks remain. In that event, economic policy slippage or a political setback could threaten disbursements from the IMF or key international donors, and lead to a rating downgrade.
Georgia's ratings are supported by its GDP per capita and level of human development, which is well above the 'B' range median, its strong GDP growth record prior to the crisis, a favourable business climate - underscored by its ranking of 15th in the World Bank's Doing Business Survey for 2009 - and strong support from the international community.
The upgrade of the Country Ceiling reflects Georgia's integration into the global economy and financial system, its commitment to creating a favourable business climate and attracting FDI, and its membership of the WTO and engagement with the international financial institutions, which reduce the likelihood the Georgian authorities would impose exchange controls.