Moody's Investors Service says that Georgia's (Ba2 stable) reform programs leading to improved macroeconomic policy, including a flexible exchange rate, development of trade and investment relationships and strengthening the supervision of its banking system contribute to a macroeconomic and institutional framework that has helped the country's economy and banking sector to absorb the significant economic, financial and exchange rate shock affecting the Caucasus region during 2014-2016.
However, material banking sector and external vulnerability risks continue to constrain the country's rating. Specifically, Georgia's external vulnerability is due to its large and persistent current account deficit, and risks in the banking sector include its high levels of dollarization.
Moody's points out that continuing reforms — including those focused on raising savings rates, education, public administration, fiscal management and financial stability — will further strengthen the economy and institutions and help to mitigate these two key credit weaknesses.
Moody's conclusions are contained in its just-released report titled "Government of Georgia: FAQ on economic reform, external financing risks and geopolitical risk".
Moody's report identifies external vulnerability risk as posing the most significant threat to Georgia's macroeconomic and financial stability. Its high current account deficit in part is due to low domestic savings, which in turn reflect low incomes. As a result, Georgia is highly reliant on external financing for domestic investment. Policy reforms aim to reduce this vulnerability, but have so far only served to partially offset such risk.
As for geopolitical risk, Moody's says that economic relations between Georgia and its key neighbor, Russia (Ba1 stable), have been improving since 2012, when the Georgian Dream coalition replaced the United National Movement of former president, Mikheil Saakashvili, in parliament. Moody's baseline assumption is that the status quo will be maintained on political issues dividing Russia and Georgia, but that progress will be made on economic and trade issues over the next 12-18 months.