Fitch Ratings-London-16 March 2018Fitch Ratings has revised the Outlook on Georgia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at ‘BB-‘.
Link to Fitch Ratings’ Report(s): Georgia – Rating Action Report
KEY RATING DRIVERS
The revision of the Outlook to Positive reflects the following key rating drivers and their relative weights:
Georgia’s growth prospects compare favourably with the ‘BB’ rated peer group, where median five-year average growth is estimated to be 3.5%. Georgia’s economy grew an estimated 4.8% in 2017, after 2.8% in 2016, and under Fitch’s latest projections looks set to achieve real GDP growth of 4.6% and 4.9% in 2018 and 2019, respectively. Composition of growth is expected to be broad-based, supported by a favourable external environment supporting growth in exports and remittances, as well as higher domestic demand driven by an increasing government drive towards higher capital spending.
Georgia’s headline fiscal deficit (estimated at 3.4% of GDP, 2017) is currently above the median 3.0% deficit of its ‘BB’ rated peers, but Fitch forecasts a gradual convergence towards 3.0% of GDP by 2019. The narrowing of the deficit reflects the government’s priority of reducing current expenditure in order to meet capital spending needs, while a positive economic outlook will help support stable growth of tax revenues. At the same time, Fitch believes a degree of fiscal discipline will be maintained through the IMF programme, which sets ceilings for government spending and on-lending activities.
Fitch’s projections for the budget deficit and growth performance are consistent with a gradual decline in government debt. Fitch sees a stabilisation in the government debt ratio, estimated at 44.5% of GDP in 2017, which is just below the median debt ratio (47.4%) of ‘BB’ category peers, and forecast by the agency to gradually decline towards 43.4% of GDP by 2019. Georgia’s government debt structure has a high level of concessional and multilateral debt (84% of total debt), but 76% is foreign currency-denominated, exposing it to exchange rate volatility. The redemption profile is manageable. For 2018-2019, Fitch estimates upcoming government debt maturities averaging 4.7% of GDP and interest payments equivalent to 3.0% of revenues.
Georgia’s current account deficit (CAD) to GDP ratio improved significantly in 2017, with preliminary estimates by Fitch showing a CAD of 8.7% of GDP, compared with 12.8% of GDP in 2016. We estimate that the current account including net FDI inflows was broadly in balance in 2017. For 2018-2019, Fitch forecasts an average CAD of around 10% of GDP, with FDI inflows averaging 7.6% of GDP. Upside risks to Fitch’s forecast could potentially come from stronger exports, particularly in the tourism sector, which had a very positive year in 2017.
Georgia’s ‘BB-‘ IDRs also reflect the following key rating drivers:
Georgia’s ratings balance favourable governance and business environment indicators compared with rated peers and resilience to recent macroeconomic shocks with weak external finances, including large current account deficits, high net external debt and low external liquidity.
Georgia has made good progress remaining on track with performance and structural benchmarks set out under its three-year extended fund facility (EFF) agreement with the IMF; completing its first review in December 2017. Continued progress in meeting benchmarks aimed at strengthening of its financial sector, external and fiscal finances (including the implementation of pension reform), will help contribute towards further improvement of structural indicators, stimulating investment and savings.
Despite the improvement in the CAD, Georgia’s external finances are weaker than the majority of its ‘BB’ category peers. Georgia’s CAD is substantially wider than the ‘BB’ peer median of 3.4% of GDP. Wide CADs reflect the country’s low level of domestic savings, as well as narrow export base and high import dependency.
Vulnerabilities in external finances are also reflected by Georgia’s net external debt to GDP (estimated at 61.6% for 2017) which is more than four times higher than the median ‘BB’ peer ratio (13.4% of GDP). Gross external financing requirements as a share of international reserves is high at 104% (estimated 2017). Level of gross international reserves increased 10% in 2017 from 2016 levels, but coverage of months of current account receipts is low (3.2 months). Steady government progress towards meeting net international reserve floors set by the IMF, together with its own medium-term ‘Larisation’ plan will help mitigate vulnerabilities in external finances.
The overall soundness of the banking sector mitigates the risks stemming from widespread dollarisation. At end-2017, the share of total deposits in foreign currency was 66%, down from 71% at end-2016, while the share of total loans in foreign currency fell to 57% from 65% in the same period. Georgia scores 2* on Fitch’s Macro-Prudential Indicator, indicating moderate vulnerability from strong credit growth. Annual credit growth is high at 15.7% (Feb 2018), but has eased from 22.4% in December 2017. The average capital adequacy ratio in the Georgian banking sector is high at 19.1% (2017) up from 15.1% in 2016, while the share of non-performing loans is low at 2.8% (2017).
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Georgia a score equivalent to a rating of ‘BB’ on the Long-Term FC IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows:
– External finances: -1 notch, to reflect that Georgia relative to its peer group has higher net external debt, structurally larger current account deficits, and a large negative net international investment position.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, could lead to an upgrade are:
– Strong and sustainable GDP growth consistent with macroeconomic stability
– A reduction in external vulnerability
– Shrinkage in budget deficits and public sector indebtedness
The Rating Outlook is Positive. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a negative rating change. However, future developments that could individually, or collectively, result in the Outlook being revised to Stable include:
– An increase in external vulnerability, for example a widening of the current account deficit not financed by FDI
– Worsening of the budget deficit, leading to further rise in public indebtedness
– Deterioration in either the domestic or regional political environment that affects economics policymaking or regional growth and stability