The FINANCIAL — 2016 will be another challenging year for growth, with key trade partners in the FSU, notably Russia, set to contract again, according to Fitch Ratings. While the real effective exchange rate depreciated by almost 5% in 2015, boosting competitiveness, a narrow export base will limit Georgia’s ability to take advantage of this. However, tourism could perform well, with Georgia potentially set to benefit from rising security risk in many competitor destinations. Low oil prices will continue to boost real incomes and credit growth will remain strong. Fitch expects the Georgian economy to grow 2.5% this year, rising to 4.2% in 2017 as external conditions improve.
Agency has affirmed Georgia’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ with Stable Outlooks. The issue ratings on Georgia’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BB-‘. The Country Ceiling is affirmed at ‘BB’ and the Short-term foreign-currency IDR at ‘B’. The ratings balance Georgia’s large current account deficit, high level of external debt, low external liquidity and subdued per capita income levels with high share of concessional debt, economic resilience, favourable governance indicators and the policy anchor of an IMF stand-by arrangement (SBA).
The Georgian economy is vulnerable to external shocks and has been affected by the recession in Russia and other important trading partners in the former Soviet Union (FSU). As of end-2014, 51% of Georgian exports went to countries in the FSU (equivalent to around 9% of GDP) and remittances from Russia (around 50% of the total) were equivalent to almost 5% of GDP. In nominal USD terms, merchandise exports fell by around 23% in 2015. Remittances decreased 25%, with those from Russia falling 39%.
However, despite the negative trends, Georgia’s real GDP growth held up fairly well in 2015, with the economy expanding 2.8% in real terms. In part, this is because Georgia has diversified its export markets away from Russia since the war between the two countries in 2008.
29% of Georgian exports go to the EU, 8% to Turkey, 6% to China and 5% to the US. Import compression played a role in maintaining positive headline growth, while the plunge in oil prices has lowered inflation, boosting real incomes.
Owing to the external shock, Fitch estimates that the current account deficit (CAD) widened marginally to 11.4% of GDP in 2015. Lower oil prices provided some relief.
The depreciation of the exchange rate saw gross external debt (GXD) jump to an estimated 105.7% of GDP in 2015, up from 82.9% in 2014. The risks are mitigated by over 20% of GXD being inter-company lending, while a further 30% is government borrowing, almost 90% of which is concessional. Nevertheless, while the CAD will narrow gradually (Fitch forecasts a deficit of 10.2% of GDP in 2016 and 8.6% in 2017), less than half will be funded by FDI inflows, meaning that GXD will continue to increase. Foreign exchange reserves cover only 3.1 months of current external payments (CXP), which is in line with that of recent years but below the ‘BB’ median of 4.2 months.
Around 78% of total public debt is denominated in foreign currency.
Following the depreciation of the lari in 2015, gross general government debt reached 41.4% of GDP, up from 35.5% in 2014.
Around 65% of total public debt is owed to either multilateral or bilateral donors, mostly on concessional terms.
The general government deficit widened to 3.8% of GDP, from 2.9% in 2014, as weaker growth weighed on revenues. Some uncertainty surrounds fiscal projections for 2016-17 with the government still negotiating capital spending plans with the IMF. Fitch’s baseline scenario is for general government deficits of 3.4% in 2016 and 3.1% in 2017.
A three-year IMF SBA signed in 2014 remains an important policy anchor. However, the IMF delayed the second and third reviews under the SBA in 2015, owing to objections to certain policy initiatives, including the government’s attempt to remove responsibility for banking supervision from the National Bank of Georgia (NBG). The government now appears to have accepted the IMF’s position on this issue.
The political environment is quite polarised, and tensions could remain high in the run-up to the parliamentary election in October. However, Georgia continues to enjoy very strong governance indicators by regional and rated peer standards. The slow normalisation of bilateral relations with Russia is positive for political stability.
The banking sector has so far been resilient to the weakness of the lari, given that around 65% of loans are in foreign currency. Non-performing loans (NPLs) have remained at around 3% of total loans, largely unchanged from before the lari devaluation, helped by moderate loan restructuring. Banks’ return on equity remained high in 2015 at above 15%. Georgian banks have solid capital buffers, with the sector’s capital adequacy ratio at 17%. However, private credit growth, part of which is unsecured lending to households, has been in double digits since 2010.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. The main risk factors that could, individually or collectively, trigger negative rating action are: Pressure on foreign exchange reserves, for example by a widening in the CAD; Deterioration in either the domestic or regional political climate that affects economic policymaking or regional growth and stability; A material rise in the public debt/GDP ratio, caused by fiscal slippage, a crystallisation of contingent liabilities, or further lari weakness.
According to Fitch ratings the main factors that could, individually or collectively, lead to positive rating action are: Smaller CADs that contribute to lower net external indebtedness; A revival of strong and sustainable GDP growth accompanied by ongoing fiscal discipline; A declining trend in the dollarisation ratio.
Fitch expects the Russian economy to contract 1.5% this year, before growing 1.5% in 2017.
Beyond 2017, Fitch assumes that the government will maintain its medium-term ambition to keep the fiscal deficit below 3% of GDP, stabilising the general government debt ratio below 40% of GDP.