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Standard & Poor’s Ratings Services Raised its Long-Term Foreign- and Local-Currency Ratings on the Government of Georgia to ‘BB’-

Published: November 22, 2011 | 5:14 pm
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LONDON (Standard & Poor’s) Nov. 22, 2011–Standard & Poor’s Ratings Services today raised its long-term foreign- and local-currency ratings on the Government of Georgia to ‘BB-’ from ‘B+’. At the same time, the short-term foreign- and local-currency ratings were affirmed at ‘B’. The outlook on the ratings is stable. The recovery rating is ’4′. The transfer and convertibility (T&C) assessment is ‘BB’.

The upgrade reflects our view of Georgia’s strong growth prospects and  improving public finances. These strengths are underpinned by its commitment to market-oriented policies and its previous structural reforms and fiscal consolidation. The upgrade also reflects our view of an important stabilization in Georgia’s geopolitical and domestic political environments.

The ratings on Georgia are constrained by external vulnerabilities stemming from its large net external liability position, limited monetary flexibility due to high dollarization, and low GDP per capita. Political risk does remain a constraint on the ratings, although in our view this continues to ease.

We estimate that per capita GDP growth will average just over 6.0% during 2005-2014, above that of similarly rated peers. Economic expansion, in our view, will be underpinned by continued growth in construction, tourism, and exports. It will be financed by a rebound in credit to the private sector and further development of the agricultural sector, which employs around 50% of the working population. Growth during 2004-2007 benefitted from significant

FDI inflows, peaking at 16% of GDP in 2007 on the back of an aggressive privatization agenda. We expect FDI inflows (averaging 6% of GDP annually) alongside public sector investment will support growth in tourism, agriculture, energy, and infrastructure. We forecast GDP per capita to reach a still-low $3,300 in 2011.

Georgia’s fiscal deficit has narrowed significantly to an estimated 3.7% of GDP in 2011. This is from 9.2% in 2009, when the government increased spending on public investment with the help of international financial institutions funding after the 2008 conflict with Russia and the global financial crisis.

We expect the government will adhere to its newly legislated fiscal rules, which oblige it to reduce the deficit to 3.0% of GDP by 2013. The government has frontloaded expenditure-based fiscal consolidation in 2011, ahead of what will likely be spending pressures ahead of the 2012 parliamentary and 2013 presidential elections. In our view, the government has further fiscal flexibility with capital expenditure accounting for 23% of total spending.

Georgia’s large net external liability position of over 200% of current account receipts (CARs) and just under 100% of GDP remains a key source of vulnerability, although the government’s Eurobond issue in April underlines Georgia’s access to market-based funding. Further, $2 billion (15% of GDP) in committed but not yet disbursed funds from official lenders will continue to support external funding needs. The current account deficit narrowed sharply in 2009, but has remained elevated at over 10% of GDP. In our view, increased hydropower capacity, rising exports, and, to a lesser extent, government investment to increase productivity in agriculture, will help increase CARs.

Tourism in particular has emerged as an important part of the exports equation, with receipts in 2011 estimated to reach 6% of GDP; up from 4% of GDP in 2010. Usable reserves have also improved in 2011; these are equivalent to more than three months of current account payments.

In our view, the continued, albeit slow, normalization of relations with Russia, the maturing domestic environment, and evidence of improving institutionalization reduce some of the political risk in Georgia. The signing of the bilateral World Trade Organization deal between Russia and Georgia in November 2011 is unlikely to improve the geopolitical stalemate in the near term. However, this is the first time the two sides have negotiated directly since the 2008 conflict and the deal will introduce a greater international presence (regarding customs monitoring) in the region.

The recovery rating on Georgia’s senior unsecured debt is ’4.’ This indicates our expectation of a 30%-50% recovery in the event of a default on Georgia’s commercial debt. The estimate draws on a scenario–not a base case–of renewed military conflict, which would result in a sharp depreciation of the Georgian lari, capital flight, and a running down of reserves. Our local currency rating is equalized with the foreign currency rating because monetary policy options, which underpin a sovereign’s greater flexibility in its own currency, are constrained by significant dollarization of deposits and claims, as well as relatively less-developed domestic debt markets. Our T&C assessment is one notch above the sovereign foreign-currency rating to reflect our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Georgia-based non-sovereign issuers for debt service is slightly lower than the likelihood of the sovereign defaulting on its foreign currency obligations. This reflects political uncertainties, and the possibility that, in a severe downside scenario, the government might use restrictions on access to foreign exchange needed for debt servicing as a policy tool.

The stable outlook balances our view of Georgia’s external vulnerabilities against its more-stable political environment, relatively strong economic growth prospects, and improving government finances. We would consider raising the ratings if energy and tourism exports, or foreign investment inflows, significantly reduce Georgia’s external vulnerabilities. A further strengthening of political institutions, including a longer track record and a successful transition to a new government and a new president following elections in 2012 and 2013 could also support the ratings. Conversely, the ratings could come under downward pressure if, possibly due a deterioration in the regional or domestic political environment, the external imbalances or general government deficit were to widen significantly.


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