Georgia's longer-term growth prospects are positive, S&P says
Tuesday, May 19
Standard & Poor's Ratings Services affirmed its 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings on the Government of Georgia, the rating agency reported. The outlook remains stable.
Georgia has grown at an average of nearly 6 percent per year for the past decade, which illustrates resilience, according to the agency.
“We believe Georgia's longer-term growth prospects are positive and the country will continue to pull in significant amounts of foreign direct investment (FDI), which supports the ratings. A still moderate government debt burden and controlled public finances also underpin the ratings,” S&P said.
The rating agency said that, since the last review, Georgia has faced a set of intensifying external pressures and, in its view, a continuation of heightened domestic political disruption. These factors have exacerbated existing external weaknesses and caused an increase in the government's stock of debt.
“We expect that the significant depreciation of the Georgian currency lari against the U.S. dollar will worsen the banking sector's asset quality (because 60 percent of system assets are denominated in foreign currency and the majority of borrowers earn in local currency) and lead to lower credit growth,” S&P said.
As a result, the agency has significantly lowered its growth assumptions for 2015 and 2016 by about 2.3 percent less each year.
S&P believes that one of Georgia's main weaknesses is its external position, as illustrated by persistently high current account deficits that have averaged 12 percent of GDP between 2008 and 2014, and the large stock of external debt to narrow net external debt has averaged more than 70 percent of current account receipts over the same period. Georgia has faced external pressure since the war in Ukraine erupted, which was followed by a sharp fall in oil prices, S&P said. The resulting contraction in Russian growth has lowered trade demand throughout the Commonwealth of Independent States (CIS; Georgia's main export market, accounting for an average of 45 percent of total exports between 2008 and 2014).
“Although we anticipate that FDI will hold, the growing external imbalance will probably create a need for financing with increased debt. This, in turn, is likely to weaken Georgia's net external debt position as a proportion of now much lower current account receipts,” S&P said.
S&P consequently expects that Georgia's current account deficit will widen to about 12 percent of GDP during 2015, with further downside potential if import growth doesn't reduce faster than the 4 percent drop in the first quarter of 2015.
According to the rating agency, data from the first quarter of 2015 shows an average decline of 27 percent per month in export growth, and the agency assumes a 20 percent contraction over the full year. Another key source of foreign currency earnings comes from remittances--mainly from
Russia, but also Greece and Ukraine--which the agency expects will decrease and remain between 1 percent and 2 percent of GDP, below the past five-year average (9 percent of GDP).
However, S&P projects that regional growth will improve during 2016, alongside an increase in oil prices.
«Therefore, we view the likely marked contraction in export growth over 2015 to be temporary and that the denominator effect on narrow net external debt from temporarily lower current account receipts will subside as import demand increases alongside regional growth,” S&P said.
The stable outlook reflects S&P’s expectation that the current external pressures will dissipate and that Georgia's relatively healthy fiscal position and strong long-term growth potential will provide space for the authorities to manage slower growth.
The agency could lower the ratings if Georgia's external financing needs increase markedly more than it currently expects, thereby increasing external debt, particularly if prospects for FDI deteriorate at the same time.
S&P could also consider lowering the ratings if domestic political instability materially reduces the predictability and coherence of policy-making and long-term growth prospects, or if the regional slowdown is prolonged.
The rating agency could raise the ratings if external pressures subside and support a recovery in exports, leading to growth levels stronger than our current base-case estimates. At the same time, improved prospects for investment and FDI, while maintaining fiscal discipline and policy continuity, could also support a positive rating action.