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Rating Action:

Moody's assigns Ba3/NP ratings to Georgia; outlook stable

Global Credit Research - 06 Oct 2010

First-time rating

London, 06 October 2010 -- Moody's Investors Service has today assigned first-time Ba3/Not-Prime foreign and local currency issuer ratings to the government of Georgia. The outlook is stable.

The decision to assign a rating of Ba3 reflects:

1. The country's progress in building social, political and economic institutions and providing a healthy operating environment for business that is unique in the region

2. The government's proactive response to the global crisis and the 2008 conflict with Russia, which has addressed the curtailment in foreign direct investment (FDI) and other capital inflows and maintained affordable debt service

3. Geopolitical risks due to the unresolved conflict with Russia

RATING RATIONALE

"Georgia's rating reflects marked progress in recent years in building institutional capacity that attracted substantial capital inflows and boosted growth while keeping government debt at affordable levels," says Anthony Thomas, Vice President in Moody's Sovereign Risk Group. "These favourable attributes contrast with relatively low average incomes and non-negligible geopolitical risks following the military confrontation with Russia in August 2008."

Early in the decade, Georgia was stricken by widespread corruption and highly ineffective political leadership. However, this landscape was transformed following the "Rose Revolution" of 2003, which ushered in extensive economic and political reforms. "In particular, the government introduced a liberal economic platform, with emphasis on improving the business operating environment," explains Mr. Thomas. "The authorities undertook a major effort to combat corruption, which led to a rapid improvement in government effectiveness."

These reforms delivered strong growth, which was interrupted first by the conflict with Russia and then by the global downturn, but economic activity has recovered briskly so far this year. Mr. Thomas notes that over the medium to long term, the economic model is dependent on private capital inflows to deliver strong growth, but that FDI inflows have yet to reach their pre-crisis levels. However, generous aid solicited from the international community following the conflict with Russia and proceeds from the IMF stand-by program are more than covering any shortfall at present. Remittances, which correspond to roughly 10% of GDP, have largely recovered.

Georgia was able to run counter-cyclical policies during the economic downturn thanks to IMF and aid flows, having entered the crisis with low debt levels. In Moody's opinion, the Georgian government has a credible programme to reduce the budget deficit from over 9% of GDP last year to 2%-3% within the next few years. Further, although government debt has risen steeply during the crisis, debt service remains highly affordable as it is mainly owed to multilateral lenders, who extended it to Georgia on very favourable terms.

Unsettled relations with Russia are obviously a risk factor for the rating: Moody's has assessed Georgia's susceptibility to event risk at moderate. Still, the current stalemate represents a new status quo between the two countries, particularly with regard to Georgia's regions of Abkhazia and South Ossetia. Mr. Thomas pointed out that the authorities are likely to face investor concerns until Georgia normalises its relations with Russia.

RATING OUTLOOK AND POTENTIAL TRIGGERS FOR AN UPGRADE/DOWNGRADE

The rating outlook is stable, with risks to the ratings equally balanced.

Russia's withdrawal from Georgia's regions of Abkhazia and South Ossetia and the unimpeded return of Georgian citizens displaced after the 2008 conflict, in line with United Nations General Assembly resolutions, would improve investor sentiment and reinvigorate foreign direct investment. Continued institution building would also be positive for the rating.

The outlook for economic growth would be challenged if private capital inflows do not resume, though contingency plans have been drawn up to cover this eventuality. A precipitous fall in the exchange rate could also pose problems, given high dollarisation of the economy and of the high share of foreign currency-denominated debt in the government total. But IMF stress tests suggest the fall would have to be much greater than that seen in the aftermath of the conflict with Russia to constitute insurmountable difficulties.

In conjunction with the first-time sovereign rating, Moody's also assigns a foreign currency bond ceiling of Ba1 and a foreign currency bank deposit ceiling of B1 to Georgia. The foreign currency bond ceiling reflects the risk the government would impose a moratorium on foreign currency transfer payments by non-governmental entities; the foreign currency bank deposit ceiling reflects the risk the government would impose a freeze on foreign currency bank deposits to conserve scarce foreign currency resources during a crisis.

Additionally, Moody's assigns Baa3 long-term local currency bond and deposit ceilings to Georgia, reflecting the broader financial, political and legal country risks faced by locally-funded or -domiciled credit transactions. According to Moody's sovereign rating methodology, the government's own local currency rating is not a constraint on the local currency ratings of other entities domiciled in a country. The long-term local currency bond ceiling caps the rating constellation for non-governmental entities domiciled in Georgia; the long-term local currency deposit ceiling reflects the ability of the central bank to provide liquidity to the banking system and therefore is always close to or identical to the long-term local currency bond ceiling.

The principal methodology used in rating the Government of Georgia was Moody's Sovereign Bond Methodology published in September 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES AND METHODOLOGIES

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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New York
Daniel McGovern
Managing Director - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

London
Anthony Thomas
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service Ltd.
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Moody's assigns Ba3/NP ratings to Georgia; outlook stable
No Related Data.
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