Moody’s Investors Service has upgraded the Government of Georgia’s local and foreign currency issuer ratings to Ba2 from Ba3. The outlook remains at stable.
The rating upgrade and stable outlook are supported by Moody’s view that the Georgian economy’s resilience in the wake of the regional economic shock which began in 2014 demonstrates the increasing strength of the economy and institutions. Looking forward, ongoing economic reforms, supported by the International Monetary Fund, will mitigate some of Georgia’s underlying credit weaknesses, further boosting credit strength over time. However, material banking sector and external vulnerability risks continue to constrain the rating.
Georgia’s foreign currency senior unsecured ratings have also been upgraded to Ba2 from Ba3.
The local-currency bond and deposit ceilings were raised to Baa1 from Baa3. The foreign currency bond ceiling was raised to Baa3 from Ba1 and the foreign currency bank deposit ceiling was raised to Ba3 from B1. In addition, the short-term foreign-currency bond ceiling was raised to P-3 from Not Prime and the short-term foreign currency deposit ceiling was maintained at Not Prime.
Georgia’s economy demonstrates resilience
Georgia’s economy has proved resilient to a significant economic, financial and exchange rate shock in the region in 2014-16. Georgia’s GDP growth averaged 3.4% during this period, when many of its neighbors were in or close to recession. We attribute this resilience to effective macroeconomic policy management and strong banking supervision that allowed banks to continue to finance the economy.
Looking ahead we expect Georgia’s economy to strengthen and its resilience to shocks to continue to be enhanced as ongoing measures to diversify and reform the economy bear fruit.
Such measures include the ongoing process of diversification of trade and investment relationships, including through the Association Agreement (AA) and Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU). These agreements will provide Georgia with technical and financial support to further develop its already strong institutions and further deepen political and economic relations. Closer ties and alignment with EU norms will also boost competitiveness through measures to improve customs procedures, food quality, education systems, and labor codes.
Beyond its relations with the EU, Georgia has growing access to a diverse set of markets, through various recent and prospective trade agreements, such as those with a number of Commonwealth of Independent States members, Turkey, and potentially through the prospective free trade agreement with China. This will help to maintain FDI levels at close to 10% of GDP and will likely increase exports and economic growth in the medium term.
We also expect that past microeconomic reforms, which have helped to boost the economy’s shock absorption capacity, will continue to positively affect the economy.
These reforms include success in reducing corruption to low levels compared with most other sovereigns and significant reductions in the number of taxes along with simplified tax administration, as well as broadening the availability of online tax payment. Labor market reforms started in the last few years which ease restriction on hiring, work hours and redundancy will also boost the potential for enhanced productivity in the economy.
Moreover, and beside the trade agreements, reductions in the number and level of customs tariffs have boosted export capacity by reducing the financial and administrative costs of foreign trade. This has reflected significant reductions in the number of products covered by import tariffs and cuts in a number of tariff rates leading to reduced import costs as well as simplified tariff rate administration.
The business environment has also improved through reform of the system of licenses and permits which, for example, reduce the time to register businesses and receive permits for construction projects.
Credible new reforms will further support credit strength, although key credit weaknesses remain
The Georgian authorities have signaled their commitment to ongoing reform. The track record of implementation so far lends credibility to that commitment. Over time, a number of planned measures will support Georgia’s credit profile, although key credit weaknesses in the form of banking sector and external vulnerability risk will remain.
Georgia has committed to further reforms supported by a US$285 million three-year IMF Extended Fund Facility (EFF) announced in April 2017. This program was not driven by any acute need for funding. Its main purpose is assistance focused on ongoing institution building and some key credit weaknesses including fiscal deficiencies and external imbalances and a still relatively narrow economic base.
The program emphasizes structural reforms to generate higher and more inclusive growth. The focus will be on improved education, road infrastructure investment, more efficient public administration, and further improvements in the business climate to boost the private sector’s role as a growth driver.
The program is likely to boost institutional and fiscal strength by supporting improvements in the composition of government spending and revenues, from current expenditure toward capital investment to address infrastructure bottlenecks (including through the Government’s Spinal Network). The government will also shift the tax base from direct to indirect taxes. Such changes, if effective, will enhance the effectiveness of fiscal policy in supporting growth and generating savings. Fiscal reform is anchored around the objective of maintaining moderate government debt. In 2016, government debt was 44.5% of GDP.
Importantly in the context of Georgia’s savings gap and reliance on external financing, the government has committed to introducing a funded pension in 2018, which will promote domestic savings as well as creating an institutional investor base for long-term lari assets.
However, fiscal and pension reforms will only lift savings and materially reduce Georgia’s external financing needs over a relatively long period of time. For the next several years, a large current account deficit, at -13.5% of GDP in 2016, and very large net international liability, at 136.7%% of GDP, will continue to constrain the rating.
Banking sector risk will also continue be a source of credit weakness reflecting the still high levels of dollarization in the system and consequent exposure of banks to currency movements. Lending standards are prudent and adequacy of capital and liquidity ratios meet or exceed internationally-agreed requirements. However, while some progress on larisation of the economy has been achieved, plans for further increases which would lower the contingent liability risk posed by banks to the sovereign will take some time.
The stable outlook indicates that the risks to Georgia’s rating are balanced.
We expect that the government’s measures will continue to boost economic growth and resilience, in particular through greater diversification of economic activities. Ongoing efforts to raise domestic savings and investment efficiency will complement increased diversity in exports and export markets, in part through the governments’ logistics and infrastructure spending plans.
We also expect stability in both the domestic and geo-political situation, which will facilitate continued economic and fiscal reforms.
These positive forces are balanced by the downside risks posed by still significant banking sector risk and uncertainties around the economy’s capacity to raise value adding in the economy due to constraints in the business environment including lack of clarity in areas such as insolvency law, land registration and the potential for vocational education improvements to boost the skilled labor supply. Georgia’s large current account deficit, despite rising savings, and very large net international liability position represent significant exposure for the sovereign to potential negative turns in external financing conditions.
What could change the rating up
Upward rating pressure on the rating could develop as a result of ongoing and effective reforms that sustainably raise domestic savings and reduce external vulnerability. Measures that bolster the resilience of the banking system further would also be credit positive. Finally, economic reforms that foster greater economic diversification and higher productivity growth would raise Georgia’s economic strength and potentially support the rating.
What could change the rating down
Downward pressure on the rating could develop from an increase in external vulnerability risks, notably a widening gap between domestic savings and investment, or an escalation of geopolitical risks. A deterioration in fiscal metrics could also put downward pressure on the rating.
- GDP per capita (PPP basis, US$): 10,044 (2016 Actual) (also known as Per Capita Income)
- Real GDP growth (% change): 2.7% (2016 Actual) (also known as GDP Growth)
- Inflation Rate (CPI, % change Dec/Dec): 1.8% (2016 Actual)
- Gen. Gov. Financial Balance/GDP: -1.4% (2016 Actual) (also known as Fiscal Balance)
- Current Account Balance/GDP: -13.5% (2016 Actual) (also known as External Balance)
- External debt/GDP: 107.8% (2016 Actual)
- Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 07 September 2017, a rating committee was called to discuss the rating of the Georgia, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/framework have not materially changed. The issuer’s fiscal or financial strength, including its debt profile has not materially changed. The issuer’s susceptibility to event risks has not materially changed.