Fitch: Smooth Georgia Power Shift Positive, Uncertainties Arise

Fitch Ratings-London-05 October 2012: A peaceful transfer of power following Georgia's parliamentary elections reflects positively on the country's institutions, Fitch Ratings says, but may be partly offset by an increase in policy uncertainty.

The poll held 1 October was a test of Georgia's capacity to hold competitive elections. President Mikheil Saakashvili's concession of defeat to Bidzina Ivanishvili's Georgian Dream coalition, and his promise to work "in the frame of the constitution" as president to help form a new government, suggest that Georgia will witness its first peaceful change of government at an election since 1991. The lack of violence so far suggests that that the process will be smooth, even after a heated campaign. Saakashvili's United National Movement had held power since the 2003 'Rose Revolution'.

We upgraded Georgia to 'BB-' in December last year due to a turnaround in its public finances and strong economic growth. In July 2011, parliament approved the Law on Economic Liberty, which will take effect at the end of 2013. It aims to limit the consolidated deficit to 3% of GDP and government debt to 60% of GDP, and limit consolidated budget spending to 30% of GDP. This should reduce the risk of deviation from sound fiscal policies.

A departure from sound policies or democratic norms could potentially interrupt the pipeline of multilateral concessional financing agreed following the conflict with Russia in 2008. While Georgia has borrowed on international bond markets, these flows, together with a precautionary Stand-By Arrangement with the IMF, support public and external finances. Georgian Dream's unexpected victory may still create tests for the country's democratic institutions. Saakashvili is scheduled to remain in post until presidential elections in October 2013 and any tensions in his working relationship with Ivanishvili could increase policy uncertainty. Saakashvili said in a televised address 2 October that Georgian Dream's views "were and still are fundamentally unacceptable to me," but that UNM would respect the election result as the majority verdict of the Georgian people in a democratic vote. Ivanishvili said Wednesday that he would be able to work with Saakashvili.

Bidzina Ivanishvili is a relatively recent entrant to Georgian politics, and Georgian Dream, an alliance of six relatively diverse parties, is also something of an unknown quantity. Some of its component parties have been involved in previous, short-lived coalitions that aimed at unseating UNM. If divisions emerged within Georgian Dream this too could increase policy uncertainty.

Nevertheless, Georgian Dream's broad pre-election policy statements give no reason to assume that sudden changes in economic, fiscal, or diplomatic policy are likely. They have said they will continue to aim for EU and NATO membership (while having a dialogue with Russia); that they favour a 'small government' and market-led economic model; that monetary policy will be orientated towards increasing international currency reserves; and that they will control increases in external debt and keep the fiscal deficit to below 3% of GDP.

Thus, while detailed policy will evolve as the new cabinet is appointed, at first glance there is no reason to assume that a Georgian Dream government would reverse those structural reforms enacted in recent years that have helped secure growth and successfully attracted FDI. However, there may be a greater emphasis on spreading the benefits of economic growth to combat still-high unemployment and poverty.