RAEX-Europe confirmed the sovereign government credit ratings (SGC) of Georgia at ‘BB’ (Sufficient level of creditworthiness of the government) in national currency and at ‘BB’ (Sufficient level of creditworthiness of the government) in foreign currency. The rating outlook changed from stable to negative which means that in the mid-term perspective there is a high probability of downgrading the rating score.
“The change in the outlook from stable to negative is mainly a reflection of our view that the hit of the pandemic will last longer than anticipated and will shift the fiscal stance of the government in the mid-term horizon. However, we decided to maintain the ratings at ‘BB’, as our best-case scenario shows an economic recovery faster than expected in case the pandemic eases substantially in 2Q 2021 and onwards”, agency said.
“In general, we have seen a strong deterioration of the external stance showing the outstanding dependence of the country on external events and international markets. In addition, the monetary policy has been adequate, adapting to the current economic situation and stabilizing the level of inflation, while the banking sector metrics remain quite satisfactory under the current circumstances”.
Georgian economy sunk in 2020. The economy shrunk by 6,2% in 2020 due to an overall meager performance, but mainly as a result of a decline in tourism, a key sector for the Georgian economy, due to the COVID-19 pandemic. Moreover, the strong lockdown measures imposed towards the end of 2020 caused lower private consumption, as key parts of the economy were shut down. Moreover, the global effect of the pandemic has reduced the level of exports from Georgia. Nonetheless, we anticipate the real economy to recover slightly in 2021 and to grow at around 4%; however, this will all depend on the development of the pandemic and the effectiveness of the vaccination program.
The unemployment rate increased up to 13,9% by 2020, also resulting from the coronavirus crisis. Most of the job losses are concentrated in the hard-hit tourism sector. This was further exacerbated due to the measures imposed towards the end of 2020 when cases spiked. However, we anticipate this figure to decline in 2021 as restrictions are being lifted and the vaccination campaign has recently started.
Fiscal policy to remain supportive to mitigate pandemic effects. The fiscal deficit widened substantially to around 8,8% of GDP in 2020 (see graph 2). This was chiefly caused by the strong anti-crisis spending by the government in healthcare, as well as support for businesses and households. Moreover, the augmented deficit, which includes budgetary lending, is expected to have stood at around 9% in 2020.
We anticipate the metric to remain negative in 2021 as a result of further spending to cushion the effect of the pandemic, as expenditures are estimated to be around 2% of GDP. Moreover, as a natural effect of lockdown measures and weak external demand and tourism, fiscal revenues are expected to remain depressed. Thus, we expect the deficit to remain wide at around 7,4% of GDP in 2021, while the augmented deficit to be at 7,5% of GDP.
Monetary policy tightened. The National Bank of Georgia (NBG) continues to manage the monetary policy in an adequate manner targeting inflation stability. As a consequence of inflationary pressures resulting from the depreciation of the exchange rate, higher production costs, and higher commodity prices (mainly oil and food), the NBG decided to hike the reference rate by 50 b.p. up to 8,50% back in 17 March 2021.
Contrary to our initial belief, the NBG could not hold the rate low any longer to support the economy. This is a reflection of the outstanding dependency of Georgia on external factors and the difficulty the regulator is facing in managing monetary policy in a highly dollarized economy.
The y-o-y inflation rate stood at 2,4% in 2020 but has since increased up to 3,6% as of February 2021. We anticipate the rate to be at around 3% by year-end 2021. Moreover, in order to curve the rapid depreciation of the GEL caused by low tourism, reduced inflows of funds from abroad, and instability in its main trading partners, the NBG has sold around USD 1,2 bn of FX in 2020 and 2021.
Finally, the NBG has implemented measures, such as FX swap lines with banks and MFIs to support liquidity. Also, the regulator has established tools to support financing for SMEs in order to smoothen the impact of the pandemic.
Government debt increased as a result of fiscal stimulus and currency depreciation. Gross government debt hiked substantially in 2020 posting figures of 62,5% of GDP and 253,5% of budget revenues, as we anticipated in our latest review (see graph 3). This is a consequence of the measures established by the authorities to curve the negative effect of the pandemic on the Georgian economy, the depreciation of the local currency (80% of debt is denominated in foreign currency), and the depressed nominal GDP.
The debt structure of the government remains practically unchanged. Short-term debt was about 3% of GDP in 2020. However, as previously mentioned, the share of debt denominated in the foreign currency remains high at 80% of overall debt. Despite this being mitigated by the fact that 71% of the overall public debt is owed to bilateral and multilateral creditors at favorable terms, it still carries risk in case the currency depreciation was to continue. The government has also an upcoming maturity of its Eurobond in 2021 for an amount of USD 500 m, which we anticipate will be met as the amount of government deposits is vast.
Contingent liabilities stemming from inefficient and unprofitable SOEs, as well as power purchasing agreements (PPAs) attributed to hydropower companies with attached government guarantees and public-private partnerships (PPPs) remain elevated and the risk of materialization is moderately high.
External stance remains weak and vulnerable. As previously mentioned, Georgia’s economy is highly dependent on external factors and this has been confirmed in 2020 as the whole economy took a massive hit resulting from GEL-depreciation, a decline in exports, high commodity prices, and elevated dollarization. In 2020, both the trade of goods and services, as well as the current account deficits deteriorated substantially to 19,9% and 9,8% respectively. These indicators confirm what we have previously observed, the country’s increased dependence on imports, remittances and foreign investment. In addition, the external debt of the economy hiked up to around 130% of GDP in 2020 and the banking sector remains highly dollarized.
Even though we expect better performance going forward, we do not expect external metrics to recover in the mid-term perspective. Given the lingering effect of the pandemic on the travel industry, we anticipate the tourism sector to remain depressed, remittances will remain subdued and exports will continue to stay low.
Banking sector remains resilient. We have observed mixed banking metrics in 2020, however, they have remained at overall adequate levels taking into account the current situation. By the end of 2020, the NPLs to total loans ratio stood at 2,3%, regulatory capital to risk-weighted assets decreased to 17,6%, while ROA and ROE stood at 0,2% and 1,4% (see graph 5). As mentioned in our previous review, the NBG has implemented measures to support capital and liquidity.
On the positive side, we have seen domestic credit and bank assets increasing in a steady manner. In 2020, we anticipate domestic credit to have stood at around 82% of GDP and banks’ assets at 115% of GDP.
The banking sector’s concentration remains elevated as the top three banks (TBC Bank, Bank of Georgia, and Procredit Bank) account for about 77% of the total banking system’s assets, which carries negative effects for the competition level in the country. Finally, the Georgian banking system remains highly dollarized; loans and deposits in FX were equivalent to 55,1% and 62,2% of the total portfolio as of February 2021
Stress factors:
On the positive side, we have seen domestic credit and bank assets increasing in a steady manner. In 2020, we anticipate domestic credit to have stood at around 82% of GDP and banks’ assets at 115% of GDP.
The banking sector’s concentration remains elevated as the top three banks (TBC Bank, Bank of Georgia, and Procredit Bank) account for about 77% of the total banking system’s assets, which carries negative effects for the competition level in the country. Finally, the Georgian banking system remains highly dollarized; loans and deposits in FX were equivalent to 55,1% and 62,2% of the total portfolio as of February 2021 .
Financial dollarization remains high in Georgia; loans and deposits in FX were equivalent to 55,1% and 62,2% of total portfolio as of February 2021 (moderately weak stress-factor);
Political risk stemming from the unresolved conflict of South Ossetia and Abkhazia with Russia (moderately weak stress-factor).
The following developments could lead to an upgrade:
Decrease of external exposure by reducing FX-denominated debt, advancing de-dollarization measures, increasing national savings, buffering-up international reserves and further developing productive sectors of the economy in order to reduce reliance on imports;
A substantial reduction in the amount of contingent liabilities which would reduce the overall government debt level.
The following developments could lead to a downgrade:
Strong negative impact from the coronavirus crisis, which would negatively affect the exchange rate causing asset deterioration in the financial system and reduction in international reserves as well as economic volatility;
Deterioration of the fiscal position by widening the fiscal deficit and increasing government debt including contingent liabilities’ materialization as a result of additional spending needs due to the coronavirus crisis
ESG Disclosure: Inherent factors
Quality of fiscal policy; quality of monetary policy; natural resources; natural and climatic threats; environmental threats; level of corruption, CPI; Government Effectiveness Index; quality of the business environment; position in Doing Business Ranking; level of investment in human capital, adjusted for inequality; Rule of Law Index; transparency of government policymaking Index; level of information transparency of the government; Political Stability and Absence of Violence/Terrorism Index; natural disasters, constant exposure to difficult natural conditions.
Drivers of change factors None.
