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Rating Action:

Moody's affirms Georgia's ratings at Ba2, maintains stable outlook

20 Sep 2021

Singapore, September 20, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Georgia's Ba2 local and foreign currency long-term issuer ratings and foreign currency senior unsecured rating. The outlook remains stable.

The rating affirmation and stable outlook are underpinned by ongoing development of the fiscal and monetary institutions which has enabled an effective macroeconomic policy response to the pandemic-related downturn. Structural reforms carried out during the four-year Extended Fund Facility with the International Monetary Fund have also helped to buttress the economy's flexibility in response to shocks. While fiscal metrics have deteriorated as a result of the COVID shock and the policy response to it, fiscal consolidation accomplished ahead of the pandemic created capacity for an effective policy response and provides a track record suggesting that fiscal repair will occur as the impact of the pandemic wanes. Moody's assumes that the recent political tensions will not derail the reform agenda.

Georgia's local and foreign currency country ceilings remain unchanged at Baa1 and Baa3, respectively. The four-notch gap between the local currency ceiling and the sovereign rating reflects a relatively small government footprint in the economy and strong institutions which are predictable and reliable in terms of policy action, notwithstanding a relatively high current account deficit and ongoing domestic political risks that point to some country risk. The two-notch gap between the foreign currency ceiling and the local currency ceiling incorporates Georgia's external vulnerabilities including a relatively high current account deficit and still high levels of dollarization in the economy which increase transfer and convertibility risks.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT Ba2

EFFECTIVE POLICY SUPPORT LEADING TO STRONG ECONOMIC RECOVERY

Moody's expects the economy to grow by 7.3% in 2021, following a 6.2% contraction in 2020, driven by the collapse of the tourism sector and the domestic impact of lockdowns and movement restrictions in the wake of the pandemic. The recovery is underpinned by fiscal policy support to consumption in 2021 and signs of a steady rebound in regional tourism. Remittances and non-tourism exports, such as beverages, vehicles and machinery and equipment, have also demonstrated robust growth.

Moody's expects growth to be at potential of 4-5% in the next few years, driven by increased investment in productivity-enhancing infrastructure in agriculture and manufacturing, further increases in exports to more diversified markets including Europe, partly reflecting additions to Georgia's Free Trade Agreements, and as incomes continue to rise supporting consumer spending.

Overall, the marked and sustained economic recovery is supported by effective policy. While fiscal policy took up the main burden of supporting growth during 2020, monetary policy has tightened to contain inflation pressures driven by one-off fiscal policy changes and a sharp depreciation of the lari, the latter reflecting the collapse in Georgian economic activity. The recovery of the lari in the wake of policy tightening has helped insulate the still highly dollarised banking sector.

Moody's expects inflation to fall towards the National Bank of Georgia's (NBG) inflation target of 3% from 12.8% currently after temporary factors fade and tight monetary policy offsets commodity price and international supply constraint pressures. The current account deficit will also begin to narrow from a peak of 12.5% of GDP in 2020 towards pre-pandemic levels of around 5%, as remittances and non-tourism exports grow solidly and the longer-term benefits of reforms are realized, including reform of the pension system to build domestic savings.

FISCAL METRICS TO CONSOLIDATE AS GROWTH RECOVERS

Moody's expects Georgia's fiscal metrics to improve, following a peak in the fiscal deficit of over 9% of GDP and increase in general government debt to 60% of GDP in 2020, from 42% in 2019. With a robust recovery and ongoing commitment by the government to its fiscal framework, Moody's expects a significant number of policies put in place to support growth to expire and revenues to recover. As a result, Moody's expects the fiscal deficit to narrow to around 5.3% of GDP in 2021 and just over 3% in 2022.

On the revenue side, Moody's expects revenues to rebound to 25.8% of GDP in 2021 from a pandemic influenced trough of 25.1% of GDP in 2020 and recovering gradually towards 26.5% by 2024 as GDP growth rate eases back to potential.

On the expenditure side, Moody's expects the expiry of a significant number of pandemic related support programs will lower government expenditure to around 28.5% in 2024 from a peak of 34.4% of GDP in 2020. The key programs which will expire include the temporary expansion of the Targeted Social Assistance program and unemployment benefits, wages and utilities subsidies and the pandemic related boost to healthcare spending.

Although Moody's expects general government debt to decline, it will remain higher as a proportion of GDP than before the pandemic. Moody's estimate of general government debt will peak at 60% of GDP in 2020 and begin to decline towards 53% of GDP in 2024. This compares to a pre-pandemic level of 42% of GDP in 2019. Long debt maturities of mainly concessional borrowing limit the cost of debt. Debt affordability will remain strong with interest payments absorbing around 6% of revenue.

REFORM MOMENTUM TO SUSTAIN DESPITE POLITICAL TENSIONS

Ongoing frictions in Georgia's partisan political environment pose downside risk to the credit outlook. Recently, tensions have risen after a deal brokered by the European Parliament to resolve differences over the October 2020 elections results was repudiated by the Georgian Dream party. This has also raised the risk of negative impacts on what have been the strong and effective relationships with key technical and financial supporters in the international and development institution communities.

At the same time, broad consensus on the need for fiscal consolidation and further reforms remains. Reforms such as the automation of Value Added Tax payments, and the completion of the Extended Fund Facility (EFF) with the IMF have continued. Moody's expects key reforms in such areas as education, the State-owned Enterprise sector and development of the insolvency framework to continue, even while political differences remain unresolved.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects a view that the risks to Georgia's rating are balanced. Moody's expects that the government's policy reforms will continue to support economic growth and resilience, in particular through greater diversification of economic activity over time. Ongoing efforts to raise domestic savings and investment efficiency will complement increased diversity in exports and export markets, in part reflecting the government's logistics and infrastructure spending plans. Moody's also expects stability in both the domestic and geopolitical situation, notwithstanding the domestic political frictions over much of the last 2 years. Overall, Moody's expects an environment conducive to further economic and institutional reforms.

These factors are balanced by still significant banking sector risk - related to still high, albeit declining, levels of dollarisation - and uncertainties around the extent to which the economy will see productivity gains in key sectors such as agriculture, which has failed to attract substantial domestic or foreign investment and remains dominated by subsistence producers. Furthermore, despite rising savings, Georgia's structural current account deficit and very large net international liability position represent significant exposure for the sovereign to potential negative turns in external financing conditions. Demographics and an ageing population remains a key source of social risk for Georgia's long-term potential growth rate. Uncertainties around inflation add to the downside risks, in light of the recent sharp increase, may turn out to be more persistent than we expect and test the National Bank of Georgia's credibility and effectiveness.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Georgia's ESG Credit Impact Score is moderately negative (CIS-3), reflecting exposure to demographic and employment challenges and, to a lesser extent, environmental, largely physical climate, risks; mitigated by Georgia's sustained track record of solid governance and institutional strengths which have contributed to ongoing increases in incomes and, together, support an capacity to respond to social and environmental challenges.

Georgia's overall exposure to environmental risks is moderately negative (E-3), driven by moderately negative risks related to physical climate change, notably heat stress, exacerbated by relatively high sensitivity related to the large size of the agriculture sector as employer; a low proportion of the population with access to safe water also points to environmental risks.

Moody's assesses Georgia's S issuer profile score as highly negative (S-4), reflecting risks related to an ageing population, high rates of youth unemployment, low incomes and only modest spending on health and education, albeit life expectancy is relatively high. These negative risks contrast with solid enrollment rates in education.

Governance does not pose significant risks and Georgia's track record suggests robust capacity to address some of the environmental and social challenges highlighted above. Georgia has had significant success in building institutional capacity and economic reforms which have supported flexibility in labour and product markets, supporting moves towards higher value-added activities in sectors like agriculture and increasing access to a broader range of export markets.

GDP per capita (PPP basis, US$): 14,918 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -6.1% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.4% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -9.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -12.5% (2020 Actual) (also known as External Balance)

External debt/GDP: 129.4% (2020 Actual)

Economic resiliency: baa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 September 2021, a rating committee was called to discuss the rating of the Georgia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

Moody's would likely upgrade the rating if progress towards reforms that sustainably raised domestic savings, including lifting public saving, and reducing external vulnerability, were faster than it currently expects. Measures that bolster the resilience of the banking system further would also be credit positive.

Economic reforms that foster greater economic diversification and higher productivity growth over time would raise Georgia's economic strength and potentially support the rating.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Moody's would likely downgrade the rating if there was there was a significant sustained increase in external vulnerability risks, notably a widening gap between domestic savings and investment, or an escalation of geopolitical risks. A sustained deterioration in fiscal metrics could also put downward pressure on the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Martin Petch
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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