The FINANCIAL — The government debt structure remains favorable in terms of maturity as short-term obligations were as low as 8% of total government debt and 3,6% of GDP as of 3Q 2018;
additionally, this type of debt is covered by international reserves by 5x. However, the currency structure in not fully ideal as external debt was 81,7% of total debt as of end2018; despite this, only 9,5% is from the Eurobond issue while the rest is bilateral and multilateral mostly in concessional terms;
Georgia’s GDP per capita indicator in PPP terms for 2018 stood at USD 11 600 and is at an acceptable relative to its peers3;
The banking system in Georgia is highly concentrated as the top three banks (TBC Bank, Bank of Georgia and Liberty bank) account for about 77% of the total banking system’s assets, which carries negative effects for the competition level in the country. Moreover, the sector is 90% foreign-owned;
Institutional development in Georgia is acceptable. The country has a Human Development Index (HDI) adjusted for inequality score of 0,680 and favourable governance indicators. Moreover, it is ranked 41st out of 180 in the Corruption Perceptions Index, 66th out of 140 countries in the Competitiveness index from the World Economic Forum and 6th out of 190 countries in the Doing Business ranking published by the World Bank in 2019.
Negative factors:
External vulnerabilities are the main threat to the sovereign’s creditworthiness. The trade deficit for products and services, as well as the current account deficit, was substantially
wide at 11,5% and 8% respectively in 2018 reflecting large external financing needs. Georgia depends heavily on imports (69% of GDP in 2018), mainly oil and gas, as well as remittances and FDI. In addition, the economy’s external debt is wide and buffers, albeit increasing, remain insufficient to weather a potential external shock which would exert pressure on the GEL;
The amount of contingent liabilities in Georgia is high. According to the fiscal law, the amount of such liabilities related to SOEs was equivalent to around 20% of GDP in 2018
for risky companies. This, combined with the unprofitability and lack of productivity of these types of enterprises, increases the risk of the materialization of these liabilities.
Moreover, contingent liabilities for the government also arise from existing power purchasing agreements (PPAs) which have attached government guarantees as well as public-private partnerships (PPPs);
The level of unemployment rate remains high at 12,7% as of the end of 2018;
The stock and bond markets remain largely underdeveloped. The stock market capitalization was as low as 4,7% of GDP and there are only 16 corporate bonds trading in the Georgia stock exchange. However, there are plans in place in order to further develop the non-bank financial system.
Stress factors:
Financial dollarization is high in Georgia; loans and deposits in FX were equivalent to 56% and 63% of total portfolio as of February 2019 (moderately weak stress factor);
Political risk stemming from the unresolved conflict in South Ossetia and Abkhazia with Russia (moderately weak stress factor).
SENSITIVITY ASSESSMENT:
The following developments could lead to an upgrade:
Decrease of external and FX exposure by reducing external debt, advancing dedollarization measures, increasing national savings, buffering-up international reserves and further developing productive sectors of the economy;
A substantial reduction in the amount of contingent liabilities which would reduce the overall government debt level;
The following developments could lead to a downgrade:
Unexpected negative external developments which would hit the exchange rate causing asset deterioration in the financial system and reduction in international reserves as well as economic volatility;
Deterioration of the fiscal position by widening the fiscal deficit and increasing government debt including contingent liabilities’ materialization.
“The ‘BB’ sovereign government credit ratings assigned to Georgia reflect solid public finances with controlled budget balances and public debt, efficient monetary policy, sound banking system
metrics and lingering solid macroeconomic growth with low levels of inflation.
However, it also reflects the economy’s external vulnerabilities as a result of its wide open economy, high levels of dollarization, substantial dependence on imports, FDI and remittances as
well as elevated levels of external public and private debt.
The stable outlook reflects that in the mid-term perspective we anticipate with a high probability that all underlying factors affecting creditworthiness will behave according to our base forecastscenario.” – Clarified Hector Alvarez, Associate Director of Rating-Agentur Expert RA.
