Page 44 - GEORptDec19

Fitch affirms Georgia’s BB sovereign rating
International rating agency Fitch on August 16​ ​affirmed​ ​Georgia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at BB,with a Stable Outlook. ​This is the best non-investment grade, indicating that the country features elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.
Georgia’s robust growth, above the BB average, is offset by the external vulnerabilities magnified by the ban on tourism set by Russia, the rating agency reasoned.
Fitch forecasts Georgia’s economic growth to decelerate to 4.3% in 2019, from 4.7% in 2018, as credit growth slows down and the Russian flight ban hinders expansion of the tourism sector. Nonetheless, it will remain above the forecast current BB median of 3.3%. Acceleration of infrastructure spending and slightly looser fiscal policy will support a pick-up in growth to an average 4.7% in 2020-2021.
Georgia's ratings are supported by governance and business environment indicators that are above the current medians of BB category peers, and a track record of macroeconomic resilience against regional shocks. The country’s agreements with the International Monetary Fund (IMF) are an assuring factor as well.
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.
44​ GEORGIA Country Report​ December 2019 ​ ​www.intellinews.com