Page 48 - GEORptJun22

S&P downgrades Georgia’s outlook to negative
Fitch affirms Georgia’s BB/negative rating, expects more structural reforms
Moscow recognised the breakaway regions of South Ossetia and Abkhazia as independent after fighting a war with Georgia in 2008. It stationed thousands of troops in both regions and has provided them with extensive financial support. The presence of Russian troops “increases the risk of the military conflict in Ukraine spilling over into Georgia”, Moody’s said.
S&P rating agency revised its outlook on Georgia to negative from stable, citing external balance issues and the volatile political situation impeding necessary reforms on February 26.
The negative outlook reflects risks to Georgia's ability to generate adequate foreign exchange earnings to service its sizeable external liabilities over the rating agency's forecast horizon, S&P said in its statement.
The rating would be lowered in case Georgia’s growth outlook deteriorates (which would endanger consolidation of the external and public deficits) or if the external gap’s financing further shifts to debt-generating rather than equity-based instruments.
“The recovery in the tourism sector is likely to lag the global rollout of vaccines, and we do not project a return to 2019 levels of tourist activity through 2024. Coupled with a more volatile domestic political and policy environment, this could cloud the medium-term outlook for foreign investment inflows — important for growth and external financing, in our view,” S&P analysts explained.
S&P projects Georgia's real GDP will grow by 4% in 2021 after contracting by 6% in 2020.
Economic activity, including in the beleaguered hospitality sector, will benefit from the relaxation of containment measures. Restrictions were reimposed after a sharp spike in COVID-19 cases in the last quarter of 2020. The continuation of some government support measures into 2021 should also support growth.
“While we think the opposition's demand for fresh elections is unlikely to be met, there is room for other political concessions that could end the deadlock. Former prime minister Giorgi Gakharia's recent resignation over the sentencing of an opposition leader further clouds near-term policy predictability, though the government's stated macroeconomic agenda remains unchanged,” the rating agency noted on the political side.
The move takes into account the effects of the corona crisis and follows a similar step taken by Fitch last April.
The rating agency affirmed the country’s long- and short-term foreign and local currency sovereign credit ratings at BB, as well as the negative outlook.
Georgia's governance and ease of doing business indicators outperformed the median percentile of its BB peers, the rating agency argued, while the country's commitment to the current IMF EFF programme helped maintain a positive structural reform agenda.
Fitch expected Georgia to agree a successor deal with the Fund when the EFF expires in April.
The main downside risks to Fitch's baseline related to uncertainties attached to
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