2023 April-May Analysis

Stable, yet speculative – a guide to Georgia’s credit rating

Georgia has a BB credit rating, most financial market websites show. While actually a ‘junk’ rating, this is in fact not so bad as it sounds. While this rating may leave most readers none-the-wiser, for the financiers, it is the first point to check as it is assigned by the world’s major credit vetting agencies. For the rest, there is a decided preference for sussing out investment prospects via more familiar numbers – such as 10% economic growth rate and a 155% rise in remittance inflows in 2022, or February’s 8.1% inflation rate (down from January’s 9.4%).

This seemingly obscure letter code is key to Georgia’s credit costs in international markets and does it all: gives lenders and investors the complete picture on the risks and opportunities. The strength of this system is that agency analysts look at just about every aspect of a country – financial, economic, social, political and environmental. For Georgia, the agencies’ rating has not changed much for several years now.

The rating gives a steer to help secure cheap and long-term concessionary loans from the major international institutions such as the World Bank, the IMF, the Asian Development Bank, the European Investment Bank, and so on (though so does, the agencies say, Georgia’s good relations with most of the world’s major lenders). While it does indicate a high level of risk, it is not the worst – the ratings go from AAA right down to D. To be considered non-risky, the grade must be at least BBB, at which level the country or company’s bonds are considered “investment grade.” So, BB is speculative.

These letters are part of the language of the all-powerful international credit ratings agencies – Moody’s, Standard & Poor’s, Fitch, and Scope. The letters relate to Georgia’s unsecured debt in local as well as foreign currency and currently come qualified by the phrase “Stable Outlook,” which shows that the agencies see the risks as balanced. Another qualification used is “negative,” which means the rating may be lowered in the near future, or that the issuer may underperform its peers.

A BB rating is a second-best non-investment grade. However, while it implies that Georgia can pay obligations on time over the next 12-18 months, it signals that problems could arise in the future due to possible changes in economic or financial conditions. And bonds rated “BB” fall within the category of speculative instruments that have to carry relatively high interest rates.

To give some perspective, others on the same ratings as Georgia include Vietnam, Oman, and Paraguay. Interest charged is lowest for AAA countries, such as on Fitch’s rating this year: the U.S., Germany, Australia, Denmark, Luxembourg, Singapore and Sweden. Both France and the UK have fallen to mere AAs. At the other end of the scale, with CCCs and thus carrying substantial risk are Pakistan, Mozambique, and Turkmenistan.

Commentaries and concerns

In researching Georgia, the rating agency experts quote positive points in their latest 2023 commentaries – as well as concerns. Their assessments take the view that money will continue to flow into the country as a result of Russian immigration and capital flight. The waves of Russians and Belarussians fleeing their countries to Georgia are not expected to reverse significantly and the migrants will become, says Fitch, “somewhat more integrated into the Georgian economy.” Fitch also believes that Georgian Dream is likely to continue as the largest single party, but in an election will “likely require coalition support.”

Another expectation is that inflation will fall right back to below 6% this year and 4% next. And also on the economy, average unemployment is thought likely to stay at about 14%.

Fitch, which along with Standard & Poor’s and Moody’s, controls 95% of the rating market–these U.S. groups owe their position to the international dominance of the U.S. banking network–lists Georgia’s positive rating drivers as follows:

  • Very strong GDP growth – up 10.2% in 2022, helped by rising tourism and transport business as goods are diverted through Georgia, boosting transit trade.
  • A rise in international reserves – up $0.6 billion to $4.9 billion, helping create a “buffer” to protect the lari, which last year rose 11% against the Euro and 6% against the U.S. dollar.
    Fiscal outperformance in 2022, driven by a rebound in tourism that boosted tax revenues.
  • Large migrant and capital inflows from Russia, a sizable part of which Fitch now expects will endure – creating last year an 86% rise in money transferred from Russia.
  • Macro-fiscal policy that has remained sound, with relatively tight monetary policy keeping interest rates high.
  • A sharp fall in the public debt/GDP ratio in 2022, while the IMF Stand-By Arrangement (SBA) augments confidence in policy settings and reduces downside risks.
  • A strong record of fiscal discipline and advancing reforms to improve the transparency and corporate governance of state-owned enterprises.

Looking ahead

Fitch forecasts that GDP growth will moderate to 4.5% in 2023, returning to just above the trend rate of 5.0% in 2024, and much stronger than the projected ‘BB’ median of 3.2%.

However, on the negative side, its researchers observe Georgia’s exposure to geopolitical risk because of the unresolved territory conflicts with Russia. Post Ukraine: “The government’s efforts to manage its relationship with Russia potentially represents a further complication to its aim of gaining EU candidate status.”

Fitch is also concerned about the chances of pre-election instability and Georgia’s falling governance performance – the latter having a large weighting in the credit agencies’ rating systems. However, it says it sees an established rule of law and (only) a “moderate level of corruption.”

Standard & Poor’s has not published anything on Georgia for some time, and Moody’s does not release its findings publicly, but Europe’s growing Frankfurt-based Scope Ratings is a regular follower of Georgia, its latest comment being in February 2023.

Scope’s view is similar to Fitch in seeing Georgia doing better than expected, and giving it a BB rating. It states: “A resilient economy and improving fiscal prospects, alongside reforms addressing external vulnerabilities such as elevated loan and deposit dollarization and the resilience of the banking system, are credit positive. Nevertheless, our ratings are at this stage constrained at present BB levels as a result of longer-run political and geopolitical risk.”

“After Ukraine, Georgia is assumed as being our most geopolitically at-risk sovereign of our publicly-rated sovereign universe of 38 countries, having to navigate a brittle environment affecting Eastern Europe after Russia’s actions since 2022. This accounts for the present status of Georgia outside of the European Union and NATO, its geographical proximity to Russia, and latent tensions around the regions of South Ossetia and Abkhazia after the war with Russia in 2008.”

Scope expects inflation to moderate to 5.7% this year and 3.7% next, with the interest rate lagging at 8.5% by year-end 2023 and 6.5% for year-end 2024. The economy is expected to remain robust, aided by “recovery in private demand, tourism services, and the trading sector.”

Commenting on the environment in Georgia, Scope sees substantive risks “associated with elevated air pollution in its main cities, illegal logging, as well as cattle grazing in protected areas.” This is only partially mitigated by coordinated countermeasures “such as reductions of air pollution and carbon emissions and the setting up of legislation and enforcement around waste management.”

Another Scope concern is net migration, although it expects the current 0.7% annual decline in the working population over the last ten years to ease to 0.6% from 2023-2027. It, like Fitch, notes the influx of around 90,000 Ukrainians, Russians and Belarussians as, “in the short-run at least, a boost for the labor market.”

A plus, however, despite the many challenges faced by Georgia’s small economy, is that it has established “a strong track record of engagement with its multilateral partners (such as with the IMF and the European Union), which has anchored a constructive reform agenda during the previous decade. We expect the government to remain committed to prudent policy making and fiscal discipline in the medium run.”