Moody's: Georgia's strong institutions and growth rates support its credit profile, but external vulnerabilities pose challenges

Georgia's Ba3 rating reflects high average growth rates, the government's relatively strong balance sheet, and high institutional strength, balanced by the small size of its economy and its dependence on external funding to deliver growth, Moody's Investors Service said in a report published on Thursday.

The annual update, "Credit Analysis: Georgia", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Georgia has a number of credit strengths, including its institutional capacity and pro-business operating environment, both of which have supported economic development over the last decade," said Ernest Sergenti, Assistant Vice President --Analyst and author of the report. "However, in the short-term, because of lower external demand since mid-2014, forecasts for economic growth in 2015 and 2016 are lower than the recent average and the current account deficit has worsened, as exports and remittances have declined."

Moody's forecasts real GDP growth in Georgia of around 2% in 2015, rising to 3% next year. Georgia is also vulnerable to the downturn in Russia, which absorbed 10% of Georgia's total merchandise exports in 2014 and was the source of 46% of total remittance flows in the month of July. Moody's expects Russia to contract by 4% in 2015 and by 1% in 2016.

However, the commencement of the Association Agreement (AA) and the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union in September 2014 is supportive of the rating because it improves Georgia's medium-term economic and institutional strength prospects. The country is also modernizing its transportation infrastructure and is undertaking reforms that will enhance its competitiveness, productivity, and export volumes.

The government debt burden is moderate and its debt is affordable. Georgia's government debt was 35% of GDP at the end of 2014, a figure that compares well with the country's Ba-rated peers, although debt is forecast to increase to 42% in 2015. In accordance with Georgia's fiscal rule, deficits are forecast to remain at a manageable rate of 3% of GDP for the next 12 to 18 months.

Georgia's rating range of Baa2-Ba1 captures its credit strengths and weaknesses relative to peers, and suggests upward momentum for the rating, which is reflected in the positive outlook on the rating. The rating could move up if growth and current account deteriorations reverse and if Georgia's institutional and fiscal strength remain stronger than peers.

A reduction in external vulnerabilities would also be credit positive, and will likely occur as the benefits of the AA/DCFTA start to materialize. Further progress on institutional reforms and a dissipation of threats arising from geopolitical risks would also support Georgia's sovereign credit profile.

Conversely, a sustained increase in the current account deficit that is not matched by a rise in foreign direct investment would be negative for its credit profile. A prolonged period of lower growth and a rise in geopolitical tension would also be negative.