Fitch Affirms Georgia at 'BB-'; Outlook Stable

Fri May 9, 2014 12:03am EDT

(The following statement was released by the rating agency) LONDON, May 09 (Fitch) Fitch Ratings has affirmed Georgia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-'. The issue ratings on Georgia's senior unsecured foreign and local currency bonds have also been affirmed at 'BB-'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling has been affirmed at 'BB' and the Short-term foreign currency IDR at 'B'. KEY RATING DRIVERS Georgia's 'BB-' foreign and local currency IDRs reflect the following key rating drivers: -The fiscal deficit shrank to 2.6% of GDP in 2013 on the back of lower capital expenditure as the government reviewed some of its public contracts. The government is committed to continue supporting GDP growth and expects to catch up on the postponed investment over the coming three years, widening the deficit to 3.7% in 2014 and 3.6% in 2015. In addition, the increase in social transfers voted in 2013 will result in more rigid spending. However, provided the exchange rate remains stable, the debt-to-GDP ratio should remain broadly stable in the coming years at about 36% of GDP, in line with the 'BB' median. -Georgia's current account deficit (CAD) halved in 2013 but remained high at an estimated 5.9% of GDP. Strong FDI flows have allowed for a significant increase in foreign-exchange reserves, which reduces external vulnerability. However, the improvements mainly reflected a stagnation in imports while exports were partly boosted by renewed access to Russian markets. The 2013 figure was therefore an outlier in the gradually improving trend of the CAD. We expect the CAD to widen to about 8.7% in 2014 and shrink gradually thereafter, remaining well above the median of the 'BB' category. -Georgia is vulnerable to external shocks, most importantly because more than 75% of its debt is foreign-currency denominated. The central bank actively defends currency stability and its large foreign currency reserves, at about USD2.6bn, provide some scope for future intervention. Strong FDI inflows should allow for stable foreign-exchange reserves, although external finances remain weak in comparison with the 'BB' category. The negotiation of a stand-by agreement with the IMF could reduce external vulnerability. -GDP growth slowed to 3.3% in 2013, due to the slowdown in public investment, while the private sector also held back investment during the political transition period. GDP growth accelerated to more than 7% in 4Q13 and 1Q14, and is expected to average 5% in 2014 and 5.5% in 2015, driven mainly by renewed investment growth. The slowdown in Russia, which may be intensified by further Western sanctions, poses limited risks to the growth outlook, mainly via the remittances channel. Russia accounts for a small share of goods exports and just 3% of net FDI in 2009-2013. -The peaceful transfer of power between the previous and the current governments through transparent elections indicates that Georgia's democratic institutions are working. However, on-going judicial investigations of former officials could raise tensions between the government and opposition. The bilateral relationship with Russia has thawed significantly, while Georgia is expected to sign an Association Agreement with the European Union in June 2014. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main risk factors that, individually or collectively, could trigger a negative rating action are: - Renewed pressure on reserves and the exchange rate, brought about by a widening in the CAD combined with a fall in capital inflows. If severe enough, this could present a risk to the ratings - A departure from prudent fiscal and monetary policymaking - A souring of the domestic or regional political climate The main risk factors that, individually or collectively, could trigger a positive rating action are: - A revival of strong and sustainable GDP growth combined with fiscal discipline - A moderation of external imbalances, underpinned by continuing export growth - A significant reduction in the dollarisation ratio - Further evidence of improvements in governance and political stability KEY ASSUMPTIONS Fitch assumes that the government will maintain its medium-term ambition to keep fiscal deficit below 3% of GDP, stabilising the gross general government debt ratio below 40% of GDP. Fitch assumes that Georgia regains access to IMF funding by keeping to agreed targets. A departure from these targets could expose external finances to greater risks. Fitch does not expect a deterioration of bilateral relations with Russia and expects the lifting of trade barriers to be maintained. Fitch does not expect a deterioration of domestic political stability and expects risks from territorial disputes to be contained. Contact: Primary Analyst Vincent Forest Associate Director +44 20 3530 1080 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Charles Seville Director +44 20 3530 1048 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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