25 May 2010 14:48

Fitch: affirms Georgia at 'B+'; outlook Stable

LONDON. May 25 (Interfax) - Fitch Ratings has today affirmed Georgia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+', the rating agency said in a press release.

At the same time, Fitch has affirmed Georgia's Short-term foreign currency IDR at 'B' and the Country Ceiling at 'BB-', the press release says. The Outlooks for the Long-term IDRs are Stable.

"The Georgian economy is showing signs of recovery after the severe shocks of the 2008 war with Russia, and the global financial crisis, helped by huge international financial assistance," said Ed Parker, Head of Emerging Europe in Fitch's Sovereigns team. "However, risks remain over the extent of the revival in private sector capital inflows, and fiscal retrenchment needs to continue in order to return the country to a sustainable macroeconomic position."

Economic recovery is underway, and Fitch forecasts GDP growth of 6% in 2010, after a decline of 3.9% in 2009, it says. There is early evidence of an improvement in trade performance: merchandise exports grew 55% in Q110 yoy, compared with only 6% for imports. Net equity FDI increased to 7.7% of GDP in 09H2 from 4.9% in 09H1. However, Georgia has a sizeable current account deficit of 12% of GDP in 2009, leaving the country highly dependent on external financing. Private sector capital inflows will need to recover strongly as IMF and other official financing taper off from around 2012, while external debt amortisation steps up sharply in 2013 when the USD500m sovereign eurobond matures. Net external debt at 49% of GDP at end-2009 is well above the ten-year 'B' range median of 15%.

Georgia ran a large budget deficit of 9.2% of GDP in 2009 and needs to implement a multi-year fiscal retrenchment program to put the public finances back onto a sustainable course. Encouragingly, this is underway and the government has agreed with the IMF to cut the deficit to 6.8% in 2010 and to around 2.5% by 2013. Against a track record of rapid real expenditure growth and widening budget deficits between 2003 and 2008, Fitch views it as positive for the program's credibility that the government is planning to use revenue over-performance from stronger GDP growth to speed up the reduction in the deficit. Government debt is moderate at 35% of GDP at end-2009, below the 10-year 'B' range median of 42%; and much of the debt is concessional, with long maturities, grace periods and low interest rates.

Downside risks have eased in the banking sector, after the global financial crisis precipitated major distress. It is well capitalized and liquid, and asset quality has stabilized. But it is highly dollarized, which renders macro-financial stability more vulnerable to shocks and impairs the effectiveness of monetary and exchange rate policy. Political risk is high and weighs on the sovereign rating. Fitch does not anticipate renewed military conflict with Russia or a major increase in domestic political instability, but shocks cannot be ruled out.

Georgia's ratings are underpinned by its GDP per capita and level of human development, which are well above the 'B' range medians, favourable business climate - underscored by its ranking of 11th in the World Bank's Doing Business Survey - generally good governance and growth prospects, track record of relatively low and stable inflation, and strong support from the international community.