Singapore, April 28, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Georgia's ratings to negative from stable and affirmed the local and foreign currency long-term issuer ratings and foreign currency senior unsecured rating at Ba2.
The decision to change the outlook on Georgia's Ba2 ratings to negative reflects the heightened geopolitical event risks from Russia's ongoing military invasion of Ukraine (Caa2, ratings under review) given Georgia's ongoing, albeit 'frozen', tensions with Russia over South Ossetia and Abkhazia, the unpredictability of Russia's strategic intentions in the region and Georgia's border with Russia. While not Moody's base case, a crystallization of these political risks, including a possible expansion of the military conflict to Georgia and a consequent significant and sustained impact on Georgia's economic and fiscal prospects, would weigh on its credit outlook. In this scenario, Moody's expects that Georgia would see increased financial support from its bilateral partners and international financial institutions. The possibility of such a military conflict, even if small, may itself have negative implications on Georgia's credit profile.
The affirmation of the ratings is underpinned by the solid fundamentals of Georgia's fiscal and monetary institutions which are likely to allow the continuation of an effective macroeconomic policy response to any further Covid disruptions and to offset the negative economic impacts of slowing regional growth due to Russia's invasion of Ukraine. Moody's assumes that elevated geo-political tensions will not derail the Georgian authorities' long-term economic 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.
RATIONALE FOR THE NEGATIVE OUTLOOK
The decision to change the outlook on Georgia's Ba2 ratings to negative reflects the heightened geopolitical event risks from Russia's ongoing military invasion of Ukraine. While not Moody's base case, the unpredictability of Russia's strategic intentions in the region has increased the risk of Georgia being involved in military conflict notwithstanding the Georgian government's endeavors to minimize the potential for such military conflict. The unresolved, albeit 'frozen', tension over the Russian-backed separatist regions of Georgia, South Ossetia and Abkhazia, increases the risk that Georgia becomes a target for Russian military intervention. Georgia's border with Russia enhances this risk.
In August 2008, following South Ossetian separatist attacks, a Georgian military response and subsequent invasion of Georgia by Russian, South Ossetian and Abkhazian separatist forces, a ceasefire was agreed. Russian troops subsequently withdrew from non-contested Georgian territory. In late August 2008, Russia recognized both territories as sovereign independent states but only a handful of other countries have given the same recognition. Georgia rejected the Russian position and declared both to be Russian-occupied territories. The territories continue to house Russian military contingents which increases the risk of the military conflict in Ukraine spilling over into Georgia.
In the wake of the 2008 war, tensions over the occupied territories have evolved to become essentially a 'frozen' conflict. This has reflected moves to normalize relations in the period since 2012 including visa free travel, two way discussions between government representatives and in 2018 Georgia's government's signaling of its readiness to normalize bilateral relations. However, sporadic fractiousness in the relationship between Georgia and Russia continues.
Prior to and during the Ukraine-Russian military conflict the Georgian authorities have focused on minimizing tensions with Russia, emphasizing a peaceful approach to resolving tensions on South Ossetia and Abkhazia and relatively restrained approach to the military conflict itself, including non-engagement with sanctions on Russia.
Nevertheless, while not Moody's base case, an outright military conflict would weigh on Georgia's economy and fiscal prospects. The possibility of such a military conflict, even if small, may itself have negative implications on Georgia's credit profile. While Georgia's economic relations have increasingly focused on Europe and China and reduced dependence on Russia for energy, the relationship in terms of goods exports, tourism and migrant worker remittances means that Russian economic performance still plays an important role in Georgia's growth and fiscal prospects.
RATIONALE FOR THE AFFIRMATION OF THE Ba2 RATING
The affirmation of Georgia's Ba2 ratings reflects Georgia's solid economic growth potential, robust institutions and consistent access to concessional financing sources. These are weighed against its small, relatively low-income economy, elevated debt burden, along with banking sector risk and external vulnerabilities stemming from the economy's reliance on foreign capital inflows.
Georgia's strong and improving institutional framework is anchored by close engagement with the European Union (EU, Aaa stable) and International Monetary Fund (IMF). In addition, Georgia has growing access to a diverse range of markets through various trade agreements, supporting foreign direct investment (FDI) inflows and economic growth.
Georgia's low levels of domestic savings fosters a reliance on external financing, in turn making the economy vulnerable to a tightening in external financing conditions. This is partly offset by Georgia's strong relationships with official creditors, which have provided concessional support to the economy while the country is adversely affected by the coronavirus pandemic. Other key credit challenges include the lack of scale in key sectors of Georgia's economy, which constrains productivity.
Georgia's economy is highly flexible, reflecting its product and labour markets as well as a floating exchange rate which effectively buffers external economic and financial shocks. Moody's forecast for growth of 3.8% in 2022, is lower than our earlier forecast of 7.3% growth reflecting the flow on effects of slower global growth, the impact of the Russian invasion of Ukraine, due to lower remittances flows from and exports to Russia, as well as the impact of increased uncertainty on domestic demand.
From a longer-term perspective Moody's expects potential growth to be at 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, will also boost economic activity. As solid growth continues and household incomes rise, consumer spending will make a greater contribution to growth.
Georgia's policy setting frameworks remain strong and have built long-term credibility. Georgia's current policy approach is directed at containing inflationary pressures and rebuilding fiscal policy headroom, which will support macroeconomic stability in the context of consecutive shocks from the Covid pandemic and currently the Russian invasion of Ukraine.
Positively on inflation, and in line with the National Bank of Georgia's (NBG) sustained approach of focusing on inflation, interest rates have been raised significantly. Partly as a result of tighter monetary policy, the USD/GEL exchange rate, which had depreciated by around 17% in the wake of the invasion, has returned to its pre-invasion levels, limiting the impact on Georgia's imported inflation rate, its dollar denominated debt and the still relatively high dollarized banking system.
As the impact of the pandemic has waned, Georgia's fiscal policy is moving towards repair of the fiscal metrics including a lower deficit consistent with its fiscal rule, rebuilding the capacity of fiscal policy to respond to future shocks, as well as supporting long-term development priorities including infrastructure development and improved education outcomes.
Georgia continues to attract support from international financial institutions as well as the private sector. The latter was confirmed by the over-subscribed $500 million Eurobond issuance in 2021. It is unlikely that funding would be an issue even in the case of military conflict. The IMF announced recently the establishment of a staff-level agreement with the Georgian authorities on a three-year Stand-by Arrangement (SBA) of SDR210.4 million (about $289 million).
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Georgia's ESG Credit Impact Score is moderately negative (CIS-3), reflecting exposure to demographic and employment challenges and, to a lesser extent, environmental, largely physical climate, risks; mitigated by Georgia's sustained track record of solid governance and institutional strengths which have contributed to ongoing increases in incomes and, together, support an capacity to respond to social and environmental challenges.
Georgia's overall exposure to environmental risks is moderately negative (E-3), driven by moderately negative risks related to physical climate change, notably heat stress, exacerbated by relatively high sensitivity related to the large size of the agriculture sector as an employer; a low proportion of the population with access to safe water also points to environmental risks.
Moody's assesses Georgia's social issuer profile score as highly negative (S-4), reflecting risks related to an ageing population, high rates of youth unemployment, low incomes and only modest spending on health and education, albeit life expectancy is relatively high. These negative risks contrast with solid enrollment rates in education.
Governance does not pose significant risks and Georgia's track record suggests robust capacity to address some of the environmental and social challenges highlighted above. Georgia has had significant success in building institutional capacity and economic reforms which have supported flexibility in labour and product markets, supporting moves towards higher value-added activities in sectors like agriculture and increasing access to a broader range of export markets.
GDP per capita (PPP basis, US$): 14,754 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -6.8% (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: -12.4% (2020 Actual) (also known as External Balance)
External debt/GDP: 130.2% (2020 Actual)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 25 April 2022, a rating committee was called to discuss the rating of Georgia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Given the negative outlook on the rating it is unlikely that the rating would be upgraded in the near-term. The outlook could be changed to stable if geopolitical tensions were to abate both within the wider region and between Georgia, its separatist regions, and Russia and in turn reduce the risks to Georgia's credit profile from the military conflict.
Upward pressure on the rating could develop as a result of ongoing and effective reforms that sustainably raise domestic savings, including lifting public saving which helps curtail the fiscal deficit and reduce external vulnerability. Measures that bolster the resilience of the banking system further would also be credit positive. Finally, 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
Georgia's ratings could be downgraded if geopolitical risks stemming from Russia's ongoing invasion of Ukraine were to crystallise. For example, if conditions in South Ossetia and Abkhazia were to deteriorate significantly which threatened domestic stability, or evidence of a large mobilization of Russian troops in the region which materially increased the likelihood of the military conflict spilling over into Georgia. Downward pressure on the rating could also develop from an increase in external vulnerability risks, notably a widening gap between domestic savings and investment, or an escalation of domestic or 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.
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Sovereign Risk Group
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Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077