Page 44 - GEORptOct19

S&P revises Georgia’s outlook to positive, sees potential for country to outperform
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.
Meanwhile, International rating agency Standard &Poor's (S&P) in April revised the outlook for Georgia’s sovereign rating upwards from stable to positive. ​The rating, currently in the non-investment speculative basket at BB-, would require a three-notch upgrade to become investment grade, however.
The positive outlook primarily reflects the agency’s view that Georgia's economic and external performance has the potential to outperform the current forecast over the next 12 months. S&P projects an annual growth rate of around 4% in the medium term. The improved outlook also reflects the country's continued compliance with the conditions of the existing funded IMF arrangement, the agency noted.
S&P said it could revise the outlook back to stable if weaker growth in Georgia's key trading partners, contrary to its expectations, appeared to be undermining the country's medium-term economic prospects and its external position. It could also revise the outlook back to stable or lower the ratings if Georgia's institutional arrangements weakened and led to less predictable policymaking, as well as a damaging of business confidence and growth prospects.
Conversely, S&P could raise the ratings if Georgia's economic performance proved stronger than present expectations (4% GDP growth this year and 3.5% in 2020). The agency could also raise the ratings if Georgia's external position strengthened, for example, as a result of stronger export performance and higher foreign exchange reserves at the central bank, the National Bank of Georgia (NBG). At the same time, the agency expects the public finances to remain controlled.
44​ GEORGIA Country Report​ October 2019 ​ ​www.intellinews.com