Risk scoring suggests Georgia’s credit rating should be higher

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In March, Fitch placed its BB- rating of Georgia on review for a possible upgrade, but has so far held back from an upgrade pending more vibrant economic growth and stronger public finances.

However, Georgia ranks 78th out of 186 countries in Euromoney’s country risk survey global rankings, and is nestled within the fourth of Euromoney’s five categories of risk equivalent to a B- to BB+ credit rating.

Assessing the correct credit rating is difficult, and yet Georgia is one place and more than one point better off than Paraguay, rated BB/Ba1/BB respectively by Fitch, Moody’s and Standard & Poor’s, with Georgia a BB-/Ba2 credit risk across the board.

And its score is still steadily rising, according to preliminary results from Euromoney’s third-quarter survey to be released in early October, highlighting a safer bet than its current ratings suggest.

Understandable caution

The country was badly affected by the oil price crash, with falls in oil-producing country currencies harming exports, and there are still questions concerning its debts, large current-account deficit, and political and social stability.

This was illustrated by street protests in May and June against the Georgian Dream-Democratic Georgia party majority government, resulting in prime minister Giorgi Kvirikashvili resigning and replaced by former finance minister Mamuka Bakhtadze, with a new cabinet formed.

There is more uncertainty ahead with the presidential election to be held next month, representing the last direct vote before amendments to the constitution take effect.

The former foreign affairs minister Grigol Vashadze, backed by a coalition of opposition parties led by the United National Movement of former president Mikheil Saakashvili, is a possible winner.

That would create some animosity between the executive and legislature, and increase the prospect of early parliamentary elections not due until October 2020.

On the other hand, Salome Zurabishvili, the French-born former foreign minister, is the more likely victor on the ruling party’s ticket, unless another name is put forward.

Guarded optimism

Political risk aside, a more holistic view of Georgia’s risk profile highlights an improving long-term trend explained by a range of diverse factors, including demographics and labour relations influencing longer-term fiscal metrics.

Euromoney’s survey enables experts to gauge a wide range of variables pertinent to investor risk and not just rating economic indicators.

This fact has been pressed home by several of Euromoney’s survey experts.

Among them is Margarit Mamikonyan, an economist at the Central Bank of Armenia focusing on the region, who has upgraded her structural risk score for Georgia, stating: “In recent years, the Georgian government has been trying to mitigate the consequences of demographic pressure through investments in human capital.

“The increase of public investment in education and institutional capacity aim to improve the quality of education, hence the quality of labour in Georgia.”

On top of that, capital access has improved alongside economic fundamentals.

Naturally, the country is not immune to a global trade slowdown or financial markets volatility undermining regional prospects.

And it must be remembered Georgia is not a low-risk sovereign borrower – it has an external debt ratio around 96% of GDP and a current-account deficit of 10% of GDP.

Plus, annual consumer price inflation increased in August to 3.1%, to slightly above the end-year target of 3%.

However, inflation should ease as energy and food prices stabilize, and structural reforms are continuing with the IMF’s assistance.

And Georgia’s economic growth projection for 2018 has been raised by the IMF to 5.5% from 4.8% after stronger-than-expected economic activity in the first half of the year, led by exports and migrant workers’ remittances.

This will worsen the trade and current-account deficits, but improve fiscal metrics, lowering the deficit to cap a public debt burden exceeding 40% of GDP.

With the fiscal deficit narrowing to a predicted 2.5% of GDP this year, foreign direct inflows pouring in and the tourism industry doing well, a BB credit rating seems merited.