S&P positively assesses Georgia's longer-term growth prospects
By Elena Kosolapova
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 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 hasfaced 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.
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