S&P says Georgia's monetary policy is more effective than other countries in the region

By Natalia Kochiashvili

Thursday, September 3

One of the largest Big Three credit-rating agencies, S&P Global Ratings (previously Standard & Poor’s) is an American credit rating agency and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities.

“I hope that our macroeconomic and fiscal policy will allow us to think about raising the rating by one step soon,” Machavariani said.

International rating company S&P has left Georgia's sovereign credit rating at BB and the outlook for 'stable' unchanged. According to the Ministry of Economy, this decision of S&P is especially important given the circumstances in which the report was published, namely the negative impact of the coronavirus on the Georgian economy.

Moreover, according to the report, S&P considers it possible to increase Georgia's credit rating if economic growth is reflected in higher income levels and the country's exports become more diversified, both in terms of products and geography.

The rating company named maintaining strong economic stability despite the external challenges as a strength of the country's sovereign rating. S&P considers Georgia's institutional strength to be a significant economic advantage.

The S&P report notes that the Georgian government's economic reforms, which are focused on long-term economic growth, include: implementation of infrastructure projects, further improvement of the business environment, education, and state-owned enterprise reforms. The pace and strength of the economy indicate the government's ability to reduce its debt to GDP ratio.

The rating company forecasts that the economic contraction in 2020 will result in 6% as a result of preventive measures taken against the spread of the coronavirus. The pandemic has done the most damage to the tourism sector, which is an important employer, a significant source of consumption of local goods and services, and a significant flow of currency. According to the report, despite the opening of the borders, the recovery of the tourism sector will be slow, as long as the measures of social distance remain in force. According to the forecast of the rating company, the Georgian economy will return to the level of 2019 in 2022.

S&P positively assesses the monetary policy of the National Bank, despite the growth in the first half of 2020, inflation was below 4% on average in 2010-2019. The rating agency emphasizes the effectiveness of Georgia's monetary policy compared to other countries in the region. According to the rating company, the effectiveness of Georgia's monetary policy is high - The volume of foreign reserves of the National Bank has increased by an average of $ 250 million annually since 2016, which creates a buffer against the balance of payments risks.

According to experts at Standard & Poor's, the long-standing floating exchange rate in Georgia - with some interventions - is particularly important for economic stability. The company said in a statement that in previous periods, in response to the weakened external economic environment, the exchange rate was quickly adjusted, thus avoiding drastic one-time changes. This helped maintain financial stability and allowed Georgia to avoid a sharp slowdown in lending in other countries in the region in recent years, exacerbating their economic woes.

Georgia has a floating exchange rate regime, which is an important factor in economic stability. The National Bank periodically intervenes to reduce excess fluctuations.

High levels of dollarization remain a challenge. Despite the declining trend in recent years, it is still an obstacle to the effectiveness of Georgia's monetary policy. The Rating Company appreciates the measures that the economy dollarization reduction is directed, including national and foreign currency obligations of the different liquidity requirements, pension reform, and local debt capital market development, and the introduction of deposit insurance.

It is noteworthy that the company has downgraded the outlook for several countries, including Estonia, Serbia, Slovakia, Uzbekistan, Greece, Bulgaria, and Portugal.

“After the rating agency Fitch, already the second rating agency - S&P has left Georgia's credit rating at BB level and also, the outlook has remained unchanged, which once again indicates that we have a fairly solid and stable macroeconomic and fiscal policy,” said the Minister of Finance Ivane Machavariani.

As he noted, the rating company names maintaining strong economic stability despite the external challenges as a strong point of the country's sovereign rating. According to him the report also names strong institutional governance as our strength. The work that has been done with donor organizations in terms of raising funds is especially positively mentioned.

“Traditionally, our high import dependence and consequent current account deficit have been named as weaknesses,” he added.