Page 44 - GEORptNov19

However, Georgia's external finances are significantly weaker than the majority of BB category peers and furthermore it is facing a new external shock as Russia suspended flights to and from Georgia from July 8, invoking security issues.
The authorities are assessing the impact of the ban and their policy response. Fitch assumes the IMF will allow some adjustment of the EFF to accommodate the tourism shock.
Net inflows of foreign direct investment (FDI) are forecast to cover the current account deficit each year. Net FDI is projected to average 5.9% of GDP over 2019-2021, after declining to 5.5% in 2018 from 10.8% in 2017 due to the completion of major infrastructure and energy projects. Official reserves rose to $3.3bn at end-2018 (3.1 months of current account payments, versus 4.3 months for the BB median) as FX reserve requirements increased and the National Bank of Georgia (NBG) pursued its reserve accumulation policy while remaining committed to a floating exchange rate. Reserves rose further over the first half of the year and Fitch expects they will reach $3.7bn at end-2019 (3.3 months of current account payments), although accumulation may be hampered by subdued tourism earnings and possible further FX intervention by the NBG to curb exchange rate volatility.
External vulnerabilities remain a key rating weakness but are gradually easing. The gross external financing requirement accounts for 87.4% of international reserves and is set to rise in 2021 when a $500mn Eurobond matures. The liquidity ratio is weaker than peers at 102% (172.5% for the BB median) and gross external debt (GXD) is twice the current BB median at 109.5% of GDP in 2018. Fitch forecast GXD to decline below 100% of GDP by 2021 due to sustained FDI inflows and a narrowing current account deficit; intra-company loans, which carry limited refinancing risks, accounted for an estimated 19% of GXD at end-2018.
An augmented fiscal deficit of 2.5% of GDP was recorded in 2018 and Fitch expects higher capital spending in response to the current external shock will widen the augmented fiscal deficit to 2.7% of GDP in 2019, compared with a current BB median of 2.9%. A weaker currency will lead to an increase in gross general government debt (GGGD)/GDP to 45.7% of GDP in 2019 (BB median: 44.6%). But the IMF quantitative targets will provide a policy anchor to place GGGD/GDP on a downward trajectory in the medium term, further supported by a moderate recovery of the domestic currency.
The outcome of the 2020 parliamentary elections is uncertain given declining public support for the governing Georgian Dream coalition, according to independent observers' view, a fragmented opposition and the introduction of a proportional representation system with a zero threshold, Fitch commented. However, the rating agency does not expect a shift in policy direction, with the IMF programme (likely to be renewed in 2020), Nato accession talks, and maintenance of a close relationship with the EU providing solid anchors.
44​ GEORGIA Country Report​ November 2019 ​ ​www.intellinews.com