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      FRIDAY, 27/01/2023 - Scope Ratings GmbH
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      Scope affirms Georgia’s BB ratings, and maintains a Stable Outlook

      Resilient growth since Russia-Ukraine crisis, prudent fiscal policy, strong debt profile and strengthened banking system support ratings. Heightened geopolitical and domestic political risks alongside external vulnerabilities are ratings challenges.

      For the updated report accompanying this review, click here.

      Rating action

      Scope Ratings GmbH (Scope) has today affirmed Georgia’s long-term issuer and senior unsecured debt ratings at BB in local- as well as in foreign-currency with Outlooks maintained at Stable. The short-term issuer ratings have been affirmed at S-3 in local- and in foreign-currency, with Outlooks Stable.

      Summary and Outlook

      The affirmation of Georgia’s BB ratings considers outstanding credit strengths: i) a strong economic growth outlook and a material record of structural reform; ii) prudent budgetary policies and a declining government debt trajectory; iii) a strong government debt profile and access to concessional multilateral loan support; and iv) strengthened resilience of the domestic banking system.

      The ratings are, however, weakened by the following credit challenges: i) heightened geopolitical risks relevant to Georgia after Russia’s escalation of war in the Ukraine; ii) the economy’s vulnerability to external shocks due to the small size of the domestic economy alongside elevated reliance upon external funding and high dollarisation; and iii) domestic political risks associated with political polarisation, domestic political instability as well as democratic backsliding.

      The Stable Outlook represents Scope Ratings’ view that risks to the ratings during the next 12 to 18 months are balanced.

      The ratings could be downgraded or the Outlooks revised to Negative if, individually or collectively: i) escalation of geopolitical risks meaningfully elevates adverse long-run implications for the credit; ii) external vulnerabilities were to re-rise, resulting in significant adverse effects as regards external debt sustainability and reserve adequacy; iii) the medium-run public debt trajectory weakens, due, as an example, to a looser commitment to fiscal discipline and/or a weaker-than-anticipated nominal economic growth outlook and/or iv) a rise in political risk and/or deterioration in institutions undermine/s quality of governance.

      Conversely, the ratings/Outlooks could be upgraded if, individually or collectively: i) geopolitical and security risks relevant to Georgia were to permanently dissipate; ii) external-sector risks are curtailed, such as a sustained reduction in current-account deficits and/or further accrual of FX reserves; iii) implementation of reforms enhances structural features of the economy, such as Georgia’s institutional strengths or structural growth, and/or curtails macro-financial risks; and/or iv) fiscal sustainability improves, such as due to further enhancements of the fiscal framework and/or additional declines in public debt.

      Rating rationale

      Firstly, the affirmation of Georgia’s credit ratings reflects robust economic performance, a strong outlook for future nominal growth, and a record of reform.

      The Georgian economy recovered robustly from the Covid-19 crisis, with annual growth of 10.4% in 2021 before an estimated 10% in 2022, anchored by rebound in pent-up household demand, growth of remittances and recovery in the exporting sector. Despite strong economic and trade linkages with the Russian economy, which accounted for 14% of Georgian exports, 64% of net remittances and 28% of tourism-sector inflows in 2022, Georgia has thus far weathered the crisis of Russia’s full-scale invasion of Ukraine well – observing net benefits economically thus far from wartime conditions. This resilience reflects an increase in tourism-services revenues, a significant rise in inward migration from Russia, Ukraine and Belarus alongside a rise in associated remittances inflows. Such inflows of labour and capital have boosted economic demand, strengthened exports and bolstered the value of the lari. Scope Ratings expects Georgia’s output growth to moderate only partially this year, remaining at an above-potential rate of 6.8%, acknowledging some subsiding in international financial inflows under a context of more challenging global economic conditions, alongside tighter domestic monetary conditions. After growth of 6% in 2024, the economy should converge on its medium-run rate of growth potential estimated at 5% by 2025.

      Georgia’s solid medium-run growth prospects are underpinned by a capacity to draw in foreign direct investment (FDI), which, during 2015-2019 pre Covid-19 crisis, funded the whole of Georgia’s current-account deficit, the former averaging inflows of 10% of GDP annually. FDI more than halved in 20201 compared with in years earlier due to transfers of ownership from non-residents to residents, weaker external conditions alongside domestic political instability, but recovered by 2021 to 6.6% of GDP, rising further to 9.2% during the year to Q3 2022. Despite outstanding economic risks, Scope expects FDI inflows to stay steady medium run, supported by underlying strengths of the economic structure, such as a favourable investment environment. Investment and physical infrastructure advancements are furthermore aided by a state prioritisation of public capital spending over current spending, with the former budgeted to remain sizeable medium run (around 6% of GDP annually during 2023-2027).

      Credible and effective actions of the National Bank of Georgia (NBG), such as its response to mounting inflationary pressures, further support BB ratings. Inflation started to rise materially in the first quarter of 2021, driven by supply-side factors such as gains of energy and commodities prices alongside demand-side impetus from a strong domestic recovery. This resulted in headline inflation peaking at 13.9% YoY by January of last year and averaging 11.9% for 2022 – well above 3% NBG inflation objectives. The central bank promptly raised its policy rates by a cumulative 300bps since March 2021 to 11% by a year later and has left rates unchanged since then.2 Headline inflation has resultingly partly corrected (to 9.8% by December 2022), although core inflation remains near peaks at 6.9% YoY, even as a gradual moderation in energy prices since the second half of 2022 results in some easing of inflation risks. Scope currently expects headline inflation to average 5.7% this year, before 3.7% in 2024. Despite risks it presents, high inflation does, however, support nominal economic growth (assumed at 10.2% a year over 2024-27) – aiding debt sustainability. The National Bank of Georgia has furthermore proven effective with respect to macroprudential policy reform, introducing measures containing private-sector credit growth and curtailing dollarisation via reserve-requirement incentives for banks to cut balance-sheet forex liabilities.

      The second driver of today’s ratings affirmation is implementation of a prudent fiscal-policy framework supporting a declining government debt trajectory.

      The Covid-19 crisis and budgetary countermeasures brought about significant weakening in the general government deficit in 2020, which reached 9.3% of GDP in the year, after years of modest deficits of an average of 1.2% of GDP during 2015-19. However, since 2021, strong economic recovery, coupled with rising inflation, enabled gradual improvement of the deficit abetted by strong revenue performance. Scope expects the fiscal impact of the Russia-Ukraine crisis since 2022, which has seen targeted fiscal support for vulnerable households for instance, to remain manageable and be offset by the positive effects of inflation on tax collections, particularly as regards VAT as well as income and import taxes. As such, Scope sees the general government deficit already having fallen within a government 3% of GDP deficit ceiling by 2022, at an estimated 2.8% of GDP. This would represent outperformance of an initial government objective of a deficit of 4% of GDP for the year. In addition, the government is expected to meet a fiscal-consolidation objective of limiting the deficit to 3% of GDP this year (Scope forecast of 2.5%).

      Strong nominal economic growth longer run and a commitment to fiscal prudence are expected to support decline in the general government debt-to-GDP ratio, which is predicted to decrease from 60.2% of GDP at 2020 peaks to 37.6% in 2023 before 34.4% by 2027. Challenges to this debt trajectory, however, are assumed to derive from structural depreciation of the national currency, assumed at 2.7% per year against the US dollar during 2024-27.

      The third driver of the rating affirmation is the sovereign’s robust debt profile, furthermore anchored by a reliable access to concessional multilateral loan support.

      Nearly three-quarters of Georgian government debt is on concessional interest-rate terms, reflecting a track record of sound engagement with the IMF and other international donor institutions. Ongoing engagement with the IMF has been re-advanced by recent signing of an USD 280m Stand-By Arrangement with the Fund in June 2022, incorporating USD 80m of funds readily available after completion of the first review3, furthermore providing oversight and support for economic policies for the next three years. This IMF programme is to be treated on precautionary basis. Refinancing risks are furthermore curtailed by the nearly 99% of government debt that is long-term, including a weighted-average maturity of external public debt of above eight years.

      The favourable government debt structure represents a cushion against balance-of-payment crises and helps curtail debt-sustainability risks and vulnerabilities to external crises, especially relevant given around 80% of public debt denominated in foreign currency4. To further reduce forex risks associated with such exchange-rate vulnerability, the Ministry of Finance outlined in its debt management strategy for 2023-26 a target to cut external debt below 70%5. The planned refinancing of a USD 500m sovereign Eurobond due to mature in 2026 via local-currency-denominated issuance should by itself allow said ratio to be cut below 65%.

      Finally, strengthened resilience of the domestic banking system supports affirmation of the ratings.

      The banking system has weathered recent crises comparatively well. Tier 1 capital improved during 2021 and 2022, reaching 17% of risk-weighted assets by Q3 2022, after a decline during early 2020 (to lows of 11.8% in Q1 2020). Liquidity is adequate (coverage ratio of 109.9% for GEL assets and 144.4% for forex assets as of September 2022, each above 100% regulatory minimum requirements). Due to economic recovery and consequential improvements in household creditworthiness, the non-performing loan ratio declined from 8.3% in March 2021 to 4.5% by September 2022. However, restructured loans have risen from 5.3% in March 2021 to 16.1% in September 2022 and are mostly concentrated in the hotel, restaurants and tourism sectors. Return on equity moderated since a record high of 30.9% in 2021, although remaining strong at 24.8% as of Q3 2022.

      Despite these credit strenghts, Georgia's ratings are challenged by several credit weaknesses. 

      Firstly, heightened geopolitical and security risks are outstanding after Russia’s escalation of war in the region. Aside from Ukraine, Scope considers Georgia as the most geopolitically at-risk country of its publicly-rated sovereign universe of 38 countries to Russian aggression – significantly challenging the long-run outlook of the credit and constraining ratings at BB.

      This includes especially risk surrounding separatist territories of South Ossetia and Abkhazia, after the war fought by Russia and Georgia over said regions in 2008. In a contemporary period of a revanchist Russia, proximity of Georgia to the war, unresolved territorial disputes over Georgian territories alongside a status of Georgia outside of the orbit of NATO and the European Union raise security risks.

      The ruling Georgian Dream party has sought not to aggravate the Russian government and did not initially participate in western sanctions. However, authorities have implemented international sanctions since, overseen takeover of most loans and deposits of VTB Bank Georgia by Georgian Liberty Bank (although transfer of the former’s license to a new owner remains pending) and assumed control of a large Russian-owned mineral water producer, curtailing sanctioned owners’ stake to a minority one. Furthermore, NBG has instructed banks to adhere to western sanctions on Russian entities.

      Secondly, Georgia’s small, open economy is vulnerable to external shocks and is reliant upon external financing.

      This is reflected in persistent current-account deficits. Although there was some improvement in current-account deficits during years immediately prior to the Covid-19 crisis, when the deficit declined to 5.9% of GDP by 2019 from 12.5% of GDP as of 2016, the deficit widened in 2020 to 12.5% of GDP. The current account thereafter improved during 2021 to 10% of GDP and it is estimated to have moderated further to 5.1% of GDP last year. Recurrent current-account deficits have aligned with an elevated net external liability position (net international investment position of -100% of GDP as of Q3 2022, although improving from -174% as of Q1 2021). External debt declined recently to 97% of GDP by Q3 2022, and lower external financing requirements and government initiatives to reduce external borrowing should help curtail external debt to around 60% of GDP by 2027. However, 46% of government external debt holds a variable rate4 – representing a significant risk during phases of Federal Reserve rate increases and global risk-off.

      Dollarisation remains a primary risk, although de-dollarisation has cut loans and deposits denominated in foreign currency to 44.0% and 57.0% respectively by December 2022, from the 65.3% and 64.8% shares as of end of 2019. This is due to measures taken by authorities, such as improved access to long-term resources in lari and the preferential treatment of local-currency exposures under prudential regulations. Even though the lari appreciated significantly last year, frequent phases of significant exchange-rate sell-off pose a risk for public-sector, bank and private-sector balance sheets.

      Such risk is partly offset by an adequate stock of official reserves, of USD 4.9bn in December 2022 (or around 21.5% of GDP), increased from the USD 3.8bn in April 2022, after a series of net FX purchases by the NBG during favourable FX market conditions.

      Finally, prolonged political instability adds to downside risks relevant to institutional and economic outlooks.

      Divisions have remained elevated between ruling party Georgian Dream and the largest opposition group United National Movement in an aftermath of a severe political crisis following 2020 parliamentary elections. Compared to an historical record of EU-oriented reform, Georgia has recently observed democratic backsliding. This has impacted EU accession prospects. While Ukraine and Moldova were granted candidate status for EU accession in June 2022, Georgia was granted a “European perspective” – e.g., candidacy only upon meeting specified institutional and governance objectives, specifically, around reduction of political polarisation, strengthening of an independent judiciary and deoligarchisation. A strong performance of the ruling party in October 2021 local elections has made parliamentary elections before 2024 unlikely, and Georgian Dream currently leads in opinion polling for the 2024 elections.

      Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

      Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides a first indicative credit rating of ‘bb+’ for Georgia. No adjustment was made to this indicative rating via the reserve-currency adjustment of Scope’s sovereign methodology. As such, the ‘bb+’ indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against an indicative peer group of countries.

      For Georgia, the following QS relative credit strengths have been identified: i) growth potential of the economy; and ii) fiscal policy framework. The following QS relative credit weaknesses versus the indicative peer group were identified: i) macro-economic stability & sustainability; ii) current account resilience; iii) resilience to short-term external shocks; and iv) governance risk.

      The QS generates a net one-notch downside adjustment and indicates BB long-term ratings for Georgia.

      A rating committee has discussed and confirmed these results.

      Factoring of Environment, Social and Governance (ESG)

      Scope explicitly factors in ESG sustainability issues during the ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a significant 25% weighting in the quantitative model (CVS) and 20% weighting in the qualitative overlay (QS).

      Georgia is exposed to substantive environmental risks, associated with elevated air pollution in its main cities, illegal logging as well as cattle grazing in protected areas. This is partially mitigated by coordinated policy countermeasures such as reductions of air pollution and carbon emissions and the setting up of legislation and enforcement around waste management. CO2 emissions intensity is moderate. However, the supply of energy is predominantly imported, with natural gas and oil products making up more than two thirds of the energy supply – and most natural gas coming from Azerbaijan. The 2030 climate change strategy aims to reduce greenhouse gas emissions to 35% below 1990 levels for key sectors.

      Social factors considered under the methodology include high poverty – which declined to 17.5% in 2021, after an increase to 21.3% in 2020. High structural unemployment and a weak social safety net represent significant longer-run challenges. Net emigration has seen the working-age population declining about 0.7% a year over the past decade (furthermore anticipated to drop around 0.6% a year over 2023-27), weighing on Georgia’s longer-run economic outlook. Up to 90,000 Russians, Belarusians and Ukrainians relocated to Georgia since escalation of the war in Ukraine. This represents, at least short run, a boost for the domestic labour market.

      On governance risks, divisions have remained elevated between the ruling Georgian Dream party and the largest opposition group United National Movement. Compared to an historical record of EU-oriented reform, Georgia has recently observed democratic backsliding. While Ukraine and Moldova were granted candidate status for EU accession in June 2022, Georgia was granted only a “European perspective” – e.g., candidacy only after meeting specified institutional and governance objectives. Outside of Ukraine, Scope Ratings considers Georgia the most geopolitically at-risk country of its rated sovereign universe to Russian aggression – challenging the sovereign’s long-run credit outlook. Former-President Mikheil Saakashvili was arrested on abuse of power after flying in from exile to stand for the October 2021 local elections, with warnings about his health after multiple hunger strikes.

      Rating committee
      The main points discussed by the rating committee were: i) geopolitical risk long term; ii) institutional risk; iii) EU accession process; iv) external-sector risk; v) economic recovery; vi) fiscal dynamics and trends in debt trajectory; vii) QS adjustments; and viii) peers considerations.

      Rating driver references
      1. National Statistics Office of Georgia: Foreign Direct Investments 2020 (Adjusted)
      2. National Bank of Georgia: Monetary Policy Committee Decisions
      3. IMF Executive Board Completes First Review under the Stand-By Arrangement with Georgia
      4. Ministry of Finance of Georgia: Public Debt Management
      5. Ministry of Finance of Georgia: General Government Debt Management Strategy 2023-2026

      Methodology
      The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
      Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

      Solicitation, key sources and quality of information
      The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
      With Rated Entity or Related Third Party participation    YES
      With access to internal documents                                  NO
      With access to management                                           YES
      The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
      Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

      Regulatory disclosures
      These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
      Lead analyst: Dennis Shen, Director
      Person responsible for approval of the Credit Ratings: Dr Giacomo Barisone, Managing Director
      The Credit Ratings/Outlooks were first released by Scope Ratings on 30 June 2017. The Credit Ratings/Outlooks were last updated on 3 September 2021.

      Potential conflicts
      See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

      Conditions of use / exclusion of liability
      © 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.

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