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- Depository Insurance: GEL 0
- Income Tax: 0%
- Corruption Index: 50
- Peace Index: 111
- Date Modified: Jun-2015
Syndicated Analyses:Fitch Ratings "Fitch Revises Georgia's Outlook to Stable; Affirms at 'BB-'" 17-Apr-2015:
Fitch Ratings has revised the Outlook on Georgia's Long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive and affirmed the IDRs at 'BB-'.
Georgia has experienced multiple external shocks following the lower oil price/sanctions-induced downturn in Russia, which has spilled over to surrounding CIS economies, triggering a wave of trading partner currency devaluations. These developments have had a highly adverse impact on Georgian trade and remittances: exports have fallen sharply, while remittances are down about 25%. The external sector remains Georgia's main weakness. The Georgian lari has depreciated by about 30% from its 2011-13 levels compared to the US dollar, although the real effective exchange rate has remained relatively stable. The floating of the lari provides a shock absorber and mitigates the decline in foreign-exchange reserves. Nevertheless, the central bank has intervened on six occasions since November 2014, lowering reserves by USD240m to USD2.45bn in March, their lowest level since January 2011. We expect reserves to fall below 2.5 months of import coverage in 2015 and 2016, well below the 'BB' median.
Economic growth is expected to slow markedly to 2% in 2015 from 4.8% in 2014, primarily due to spillovers from the regional economic downturn.
The lari depreciation will reduce Georgia's per capita GDP in US dollar terms from USD3,623 in 2014 to an estimated USD2,923 in 2015, a fall of almost 20%, leaving it over 30% below the 'BB' median.
Georgian banks do not run major short open current positions, which will limit direct devaluation losses. Foreign currency-deposit outflows (adjusted for exchange-rate changes) have been moderate and banks have significant liquidity cushions, partly because of stringent regulations. The economy is highly dollarised. Nonetheless, with over 60% of banks' loan portfolios US-dollar denominated, the fall of the lari could create asset-quality pressures and a slight decrease in regulatory capital ratios due to asset inflation.
Georgia continues to demonstrate a strong commitment to economic and structural reforms, guided by a succession of IMF programmes, including a three-year standby arrangement signed in July 2014.
Russia's decision to sign an integration treaty with the breakaway regions of South Ossetia and Abkhazia has sparked some protest from Georgia, the US and the EU, but so far has not derailed the slow and relative normalisation of the bilateral relationship.Moody's Corporation "Moody's changes outlook on Georgia's Ba3 sovereign rating to positive from stable" 22-Aug-2014:
The key driver of today's outlook change is the entering into force in September 2014 of Georgia's Deep and Comprehensive Free Trade Area (DCFTA) with the EU, which Moody's expects will attract further foreign direct investment (FDI) and bolster the country's export performance. This should in turn support an improvement in Georgia's external position over the medium term. The affirmation of the Ba3 rating reflects the combination of external vulnerability and geopolitical risks in the near term, as well as the volatile nature of the Georgian economy.
The EU is one of Georgia's largest trading partners. In 2013, Georgia's goods exported to the EU accounted for 21% of total goods exports, whilst FDI from the EU -- mostly from the Netherlands, Luxembourg and Germany -- accounted for 43% of all FDI over the period 2010-13.
Georgia's institutional capacity and economic governance have improved significantly since the Rose Revolution of 2003 and compare well with those of its rating peers
According to the World Bank's 2014 'Ease of Doing Business' survey for example, Georgia ranked 8th out of the 189 countries surveyed, an improvement on its 100th place (out of 155 countries) in 2005. Georgia ranked 72nd out of 148 countries in the 2013-14 World Economic Forum's Global Competitiveness Index, up from 77th in the previous survey (2012-13). Lastly, according to the 2012 World Bank governance indicators for government effectiveness, the rule of law and the control of corruption, Georgia is positioned, respectively, 48th, 63th and 50th (out of the 122 countries rated by Moody's and that are covered by the survey).
A suspension of the Free Trade Agreement between Georgia and Russia would likely trigger taxes on Georgian products exported to Russia (wines, water minerals and ferroalloys mainly), constraining future export growth to that country. However, given the volume of exports of those goods to Russia, the costs of such a scenario to Georgia would be outweighed by the benefits of the implementation of the DCFTA.
Since the 2008 conflict with Russia and the tension related to the breakaway regions of Abkhazia and South Ossetia, Georgia has had a tense relationship with Russia. Tensions have been subsiding progressively since 2012, primarily in the economic field, but Moody's expects this trend will stall in view of heightened tensions in the CIS region. That said, Moody's continues to assess the risk of an escalation of tensions between Georgia and Russia to be at most 'moderate', and consistent with the current rating level, given for example that the Russia's economic or strategic interests in Georgia are minimal.
With GDP of $16 billion and a population of 4.5 million, Georgia is a small, relatively undiversified economy, the exposure of which to shocks has been demonstrated over the last couple of years. This fragility was exhibited in 2012 when a change in government took place, with political uncertainties leading, through their impact on consumer confidence and the investment climate, to an economic slowdown through 2013.Reuters "S&P affirms Govt of Georgia 'BB-/B' ratings; outlook stable" 04-Dec-2012:
We expect the Government of Georgia's economy to continue to perform strongly and the government to remain committed to fiscal consolidation and market-oriented policies. -- A smooth and peaceful transition of power took place in Georgia for the first time since post-Soviet independence when the Georgian Dream coalition unexpectedly defeated the United National Movement on Oct. 13, 2012.
The stable outlook balances our view of Georgia's external vulnerabilities against its strong economic growth prospects and improving political environment.
We view the recent peaceful and democratic government transition following the October 2012 elections as a positive, underlining the strength of political institutions, although we remain cautious about political stability domestically and also regionally, with regard to Georgia's separatist regions and Russia.
Ivanishvili seems to favor more positive relations with Russia, but we think it is unlikely that bilateral relations will improve significantly, or that the trade embargo imposed by Russia will be lifted any time soon.
We expect Georgia's current account deficit to widen further in 2012 to 13% of GDP, driven by a widening of the trade balance, pushed up in part by domestic and foreign investment.
We expect real GDP growth in 2012 to reach 7%, after a similar expansion in 2011. Growth is broad-based, driven by construction, manufacturing, financial intermediation, and tourism, and financed in part by an ongoing rebound in credit to the private sector. We expect the new government to stick with the fiscal consolidation program, and for the deficit to narrow to 3% of GDP in 2013 from 3.5% in 2012, as the fiscal rule mandates.
The high level of dollarization, currently around 60% of deposits, remains a major challenge for Georgia's monetary policy, although the level is falling.