Fitch Ratings has revised the Outlook on Georgia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB'.
KEY RATING DRIVERS
The revision of the Outlook on Georgia's IDRs reflects the following key rating drivers and their relative weights:
Macroeconomic Performance Supports Outlook: The Positive Outlook partly reflects very strong GDP growth, a rise in international reserves, and fiscal outperformance in 2022, driven by a rebound in tourism, and large migrant and capital inflows from Russia, a sizeable part of which Fitch now expects will endure. Macro-fiscal policy has remained sound, with relatively tight monetary policy, and contained expenditure growth and buoyant revenues supporting fiscal deficit reduction and a sharp fall in public debt/GDP in 2022, while the IMF Stand-By Arrangement (SBA) augments our confidence in policy settings and reduces downside risks.
Exceptionally Strong GDP Growth: The economy expanded by an estimated 10.3% in 2022, following 10.4% growth in 2021, with domestic demand boosted by the surge in migrants and a sharp increase in transportation, while tourism receipts rose to pre-pandemic levels. Fitch forecasts GDP growth will moderate to 4.5% in 2023, due to fading support from Russian inflows and weaker external demand, returning to just above the trend rate of 5.0% in 2024, and much stronger than the projected 'BB' median of 3.2%. We have greater confidence that last year's migrant and capital inflows will not sharply reverse, partly due to the protracted nature of the war in Ukraine and as migrants become somewhat more integrated into the Georgian economy.
Improved External Buffers: Strong capital inflows and a narrowing current account deficit drove a 13% appreciation of the lari against the US dollar over the last year, and lifted international reserves by USD0.6 billion to USD4.9 billion in the year to end-December. Around 90,000 Russian and Belarusians migrated to Georgia in 2022, money transfers surged by 86%, and tourism rebounded, narrowing the current account deficit by an estimated 6.4pp to 4.0% of GDP. Fitch projects the current account deficit widens to an average 6.8% in 2023-2024, partly reflecting a limited reversal of migration trends, and international reserves end 2024 at 3.3 months of current external payments, from 3.2 months at end-2022.
Fiscal Outperformance in 2022: The general government deficit fell an estimated 3.8pp in 2022 to 2.7% of GDP, below the original budget target of 4.0%, driven by strong revenue growth, alongside relative expenditure restraint. Fitch forecasts a deficit of 2.6% of GDP in 2023, as tax revenue growth moderates and higher public sector wage spending partly offsets the withdrawal of remaining pandemic support. We project the deficit edges up to 2.8% of GDP in 2024 on moderate pre-election spending, slightly below the 3.0% fiscal rule ceiling, and the projected 'BB' median of 3.2%. Georgia has a strong record of fiscal discipline, and is also advancing reforms to improve the transparency and corporate governance of state-owned enterprises.
Public Debt Stabilises at Lower Level: Fitch estimates public debt fell by a greater-than-expected 9.3pp in 2022 to 40.1% of GDP, returning to its pre-pandemic level, supported by a high GDP deflator. We project public debt/GDP to stabilise in 2023-2024, ending 2024 at 39.7%, below the projected 'BB' median of 55.0%. There is a high degree of exchange rate risk, given 75% is foreign-currency denominated, although 70% is on concessional terms and the weighted average maturity of external debt is more than eight years. Georgia successfully completed the first review of its three-year USD40 million SBA in December. Strong programme compliance provides a further fiscal anchor and helps reduce external liquidity risk, although we do not anticipate Georgia will draw down on the facility.
Georgia's ratings also reflect the following rating drivers:
Fundamental Rating Strengths and Weaknesses: The rating is supported by Georgia's strong governance and economic development indicators relative to the 'BB' medians, and by its credible macro-fiscal policy framework. These factors are balanced by significant exposure of public debt to foreign-currency risk, high financial dollarisation, and weaker external finances, including high net external debt and a large negative international investment position.
Inflationary Pressure: Inflation eased to 9.8% in December, from 13.3% in May, with core inflation of 6.8%, but still well above the National Bank of Georgia's (NBG) target of 3%. We forecast inflation falls to 5.2% at end-2023, due to base effects, the lagged effects of currency appreciation, lower global commodity prices, and as demand normalises given the peak of the immigration influx has passed, and to 3.9% at end-2024, but risks remain skewed to the upside.
Geopolitical Challenges: Georgia is exposed to geopolitical risks from the unresolved conflicts involving Russia in Abkhazia and South Ossetia. The government's efforts to manage its relationship with Russia potentially represents a further complication to its aim of gaining EU candidate status. In not granting Georgia this status in June 2022, the EU set out priority reforms including to strengthen the judiciary and political representation and reduce oligarch influence. More generally, Georgia's World Bank governance percentile ranking has declined 1.5pp over the last two years and we do not anticipate a clear reversal of the recent trend.
Elections Moderately Increase Policy Uncertainty: Current polls suggest that the ruling Georgian Dream will comfortably remain the single largest party following next year's parliamentary elections, but it would likely require coalition support, potentially involving challenging political negotiations. While this could result in somewhat greater political instability and uncertainty, and further limit the prospects of advancing structural reforms and improving the business environment over time, Fitch does not anticipate any marked change in macro-fiscal policy settings.
Banking Sector Resilience, High Dollarisation: The Georgian banking sector is stable and has generally sound credit fundamentals. The sector Tier 1 capital ratio improved 1.5pp in 2022 to 17.1%, regulatory non-performing loans fell to 4.0%, return on average equity is strong at 25% (9M22), and the outlook for profitability is good. The liquid asset ratio has risen to 23% helped by a sharp rise in non-resident deposits, and muted real credit growth of 5% (annualised) in 9M22. Deposit dollarisation has steadily fallen to 57.1%, supported by macro-prudential measures, but still well above the 'BB' median of 19.1% and a structural weakness for the sector.
ESG - Governance: Georgia has an ESG Relevance Score of '5' and '5[+]' for political stability and rights, and for the rule of law, institutional and regulatory quality and control of corruption respectively. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Georgia has a medium WBGI ranking at the 61st percentile, reflecting moderate institutional capacity, established rule of law, a moderate level of corruption and political risks associated with the unresolved conflict with Russia.
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