TEXT-S&P affirms Govt of Georgia 'BB-/B' ratings; outlook stable

Tue Dec 4, 2012 6:16am EST

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(The following statement was released by the rating agency)

Dec 04 -

Overview

-- We expect the Government of Georgia's economy to continue to perform strongly and the government to remain committed to fiscal consolidation and market-oriented policies.

-- A smooth and peaceful transition of power took place in Georgia for the first time since post-Soviet independence when the Georgian Dream coalition unexpectedly defeated the United National Movement on Oct. 13, 2012.

-- We are therefore affirming our 'BB-/B' ratings on Georgia.

-- The stable outlook balances our view of Georgia's external vulnerabilities against its strong economic growth prospects and improving political environment.

Rating Action

On Dec. 4, 2012, Standard & Poor's Ratings Services affirmed its long-term foreign- and local-currency ratings on the Government of Georgia at 'BB-'. At the same time, we affirmed our short-term foreign- and local-currency ratings at 'B'. The outlook is stable. The recovery rating is '4'. The transfer and convertibility (T&C) assessment is 'BB'.

Rationale

The affirmation reflects our view that Georgia's economy will continue to perform strongly and its new government remain committed to fiscal consolidation and market-oriented policies. The ratings are constrained by high external vulnerabilities, limited monetary flexibility, and low GDP per capita. They are supported by strong economic growth prospects, fairly low private and public debt, and stabilizing public finances. We view the recent peaceful and democratic government transition following the October 2012 elections as a positive, underlining the strength of political institutions, although we remain cautious about political stability domestically and also regionally, with regard to Georgia's separatist regions and Russia.

The coming year will be a key test for the stability and predictability of Georgia's policymaking. Georgia underwent its first leadership change within the bounds of post-Rose Revolution institutions when the Georgian Dream coalition won a surprise victory over President Mikheil Saakashvili's ruling party, the United National Movement (UNM), in parliamentary elections. The election results, and the fact that Saakashvili and his party quickly conceded, bode well for dynamism and diversity in Georgian politics. The new prime minister, Bidzina Ivanishvili, formed a government by the end of October--replacing for the most part only ministers and deputy ministers--and proposed a draft 2013 budget in early November. In our view, the degree of institutionalization of democratic processes over the past eight years will help anchor the transition.

That said, we expect the relationship between Prime Minister Ivanishvili, until recently an unknown figure, and President Saakashvili to remain tense. A set of constitutional amendments will become effective after Saakashvili's second term as President expires in late 2013, reducing the power of the executive in favor of the prime minister and parliament. Until these changes are in effect, there remains residual uncertainty regarding future policy direction, and tensions between the two main parties could remain.

We expect the new government's policies to remain broadly in line with the UNM's, particularly with regard to market orientation, fiscal consolidation, and expenditure- and growth-enhancing investment agendas. Ivanishvili seems to favor more positive relations with Russia, but we think it is unlikely that bilateral relations will improve significantly, or that the trade embargo imposed by Russia will be lifted any time soon.

We expect Georgia's current account deficit to widen further in 2012 to 13% of GDP, driven by a widening of the trade balance, pushed up in part by domestic and foreign investment. In our view, the medium-term boost to current account receipts from expected energy exports and increased activity in the agricultural and tourism sectors is only likely to have a more significant positive impact on Georgia's external balance sheet after 2015. While we expect the country's net external liability position to continue to widen, we anticipate that its external debt net of liquid assets will narrow to about 70% of current account receipts in 2012. We expect real GDP growth in 2012 to reach 7%, after a similar expansion in 2011. Growth is broad-based, driven by construction, manufacturing, financial intermediation, and tourism, and financed in part by an ongoing rebound in credit to the private sector.

We expect the new government to stick with the fiscal consolidation program, and for the deficit to narrow to 3% of GDP in 2013 from 3.5% in 2012, as the fiscal rule mandates. The new government's draft budget indicates that social protection, education, and agricultural outlays will be increased partly at the expense of cuts to capital expenditure. The large share of capital expenditure in the budget--27% of total expenditures in 2011--gives the government some degree of fiscal flexibility. The government is expected to continue with the slow drawdown of undisbursed funds from the support package amounting to 35% of GDP that Georgia received from international donors after its five-day war with Russia in 2008. The undisbursed portion amounts to 17% of 2012 GDP.

The high level of dollarization, currently around 60% of deposits, remains a major challenge for Georgia's monetary policy, although the level is falling.

Outlook

The stable outlook balances our view of Georgia's external vulnerabilities against the strong economic growth prospects and improving political environment.

We might consider raising the ratings if the political transition, including a successful presidential succession, continues smoothly. Continued strong economic performance driven by domestic and foreign direct investment, further progress in consolidating public finances, and the stabilization of external balance sheets could also support a ratings upgrade.

We might lower the ratings if the political environment deteriorated, domestically or regionally, or if the external imbalances were to widen significantly.

Related Criteria And Research

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

-- Introduction Of Sovereign Recovery Ratings, June 14, 2007

Ratings List

Ratings Affirmed

Georgia (Government of)

Sovereign Credit Rating BB-/Stable/B

Transfer & Convertibility Assessment

Local Currency BB

Senior Unsecured BB-

Commercial Paper B

Recovery Rating 4

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