Moody's Investors Service, ("Moody's") has assigned a rating of Ba2 to the proposed senior unsecured, USD-denominated bonds to be issued by the Government of Georgia ("Georgia"). The notes will rank pari passu with all of Georgia's current and future senior unsecured debt.The ratings mirror Georgia's issuer rating of Ba2 with a stable outlook.
Georgia's (Ba2 stable) credit profile is underpinned by the strength of its institutions, which have fostered economic resilience and underpinned the country's track record of robust economic growth. These strengths are balanced against its small, low income economy, while banking sector and external vulnerability risks continue to constrain the rating. The open nature of Georgia's economy, with tourism and financial inflows as key drivers of growth, has amplified the severe impact of the coronavirus pandemic on its economy and balance of payments position. Moody's assessment of Georgia's economic strength reflects its significant demographic challenges - stemming from its aging, shrinking population - and persistently low productivity growth in its agricultural sector, which employs around half the country's population but accounts for a declining share of national output. Georgia's overall real GDP growth rate is relatively high when abstracting from the current negative impact of the coronavirus outbreak.
Moody's estimates that Georgia's economic growth will average 3.2% in 2013-2022.Georgia's economic growth model is heavily dependent on external financing for investment, as domestic savings are low. This is also reflected in the country's large current account deficit, though this declined significantly over 2019 before widening sharply due to the impact of the coronavirus outbreak on particularly the tourism sector. As such, the Georgian authorities face the challenge of ensuring robust growth, while simultaneously reducing external vulnerabilities.
While Georgia has seen some institutional gaps in addressing issues such as land reform and achieving significant progress towards sustainably higher savings to date, nonetheless, Moody's assessment of institutional strength is informed by the Worldwide Governance Indicators and the authorities' track record in institutional capacity building. Indeed, since the Rose Revolution of 2003, the government has made significant progress towards building social, political, and economic institutions -- reforms which have underpinned Georgia's economic resilience.
Moody's considers that convergence towards EU standards in line with the Association Agreement (AA) and Deep and Comprehensive Free Trade Agreement (DCFTA) will likely lead to further improvements in the country's institutional capacity, notably in the areas of rule of law, governance, and the development of a market economy. Recent political developments, in Moody's view, are unlikely to mean a loss of focus on long-term economic reforms, though that remains a risk.Moody's assessment of Georgia's fiscal strength reflects the impact of the coronavirus pandemic which has driven a surge in its debt burden, from 42% of GDP in 2019 to more than 61% in 2020. Partly offsetting this, Georgia benefits from a favorable debt structure, with the vast majority of its debt being in the form of multilateral and bilateral loans, which are more easily rolled over and are on concessional terms. These concessional loans help keep Georgia's debt affordable, with interest expenses accounting for only 6.2% of general government revenue in 2020. Georgia's fiscal rule should be supportive of fiscal consolidation over the medium-term.
Moody's assessment of Georgia's fiscal strength also reflects the responsiveness of the lari - which is freely floated and has continued to experience trend depreciation - to economic and political developments. With 77% of government debt denominated in foreign currency in 2019, Georgia's debt burden and debt servicing costs are vulnerable to sudden changes in the exchange rate. Moody's also believes that Georgia is more exposed to fiscal pressures stemming from the coronavirus pandemic than other similarly rated sovereigns, due to the importance of tourism and other service industries to its economy and given the likely slower path to recovery of the former.
Moody's view of Georgia's susceptibility to event risk reflects banking sector risk and external vulnerabilities. Georgia's banking system is large relative to the size of its economy, with assets accounting for around 117% of GDP in 2020. With foreign currency denominated deposits accounting for more than 60% of the total, funding for the system is vulnerable to exchange rate risk. Offsetting these risks, Georgia's banking sector, which is well capitalised and highly profitable, enjoys superior management and regulatory oversight to similarly rated peers, as evidenced by the sector's outperformance against those of Commonwealth of Independent States (CIS) sovereigns during the region's economic downturn over 2014 - 2016.Moody's view of Georgia's external vulnerability risk, reflects Georgia's large current account deficits, averaging around 9% of GDP over 2015-2019, its moderately high ratio of short-term and currently-maturing debt to foreign exchange reserves, and its large net liability international investment position, equivalent to over 130% of GDP in 2019.ISSUER RATING OUTLOOKThe stable outlook indicates that the risks to Georgia's rating are balanced.We expect that the government's policy reforms will continue to support economic growth and resilience, notwithstanding the severe impact of the coronavirus outbreak on short-term growth, in particular through greater diversification of economic activity over time. Ongoing efforts to raise domestic savings and investment efficiency will complement increased diversity in exports and export markets, in part reflecting the governments' logistics and infrastructure spending focus. We also expect long-term stability in both the domestic and geopolitical situation, notwithstanding recent domestic political events and tensions with Russia which had flowed into domestic political frictions over much of the last 12 months. This will help foster an environment conducive to further economic and institutional reforms.These positive forces are balanced by still significant banking sector risk - stemming from high levels of dollarisation - and uncertainties around the extent to which the economy will see productivity gains in key sectors such as agriculture, which has failed to attract substantial foreign investment and remains dominated by subsistence producers. Furthermore, despite rising savings, Georgia's structural current account deficit and very large net international liability position represent significant exposure for the sovereign to potential negative turns in external financing conditions.
Georgia's ESG credit impact score is Moderately Negative (CIS-3), balancing negative demographic and employment challenges and moderately negative environmental, largely physical climate, risks. This is counterbalanced by Georgia's sustained track record of solid governance and institutional strengths which have contributed to ongoing increases in incomes which support an improving capacity to respond to demographic and environmental challenges. Moody's assesses Georgia's exposure to environmental risks as "moderately negative" (E-3 issuer profile score), reflecting moderately negative risks related to physical climate change, notably heat stress, unsafe water issues and associated exposure to an agriculture sector which is a significant employer. Moody's sees low risk stemming from waste and pollution issues. In Moody's assessment, Georgia is highly exposed to social risks (S-4 issuer profile score) reflecting risks related to a moderately ageing population, high rates of youth unemployment, low incomes and only modest spending on health and education, albeit life expectancy is relatively high. These negative risks are partly offset by solid enrollment rates in education. Governance does not pose significant risks (G-2 issuer profile) and Georgia's track record suggests the capacity to address some of the challenges highlighted above. Georgia has had significant success in building institutional capacity and economic reforms which have supported flexibility in labour and product markets which have supported moves towards value adding in sectors like agriculture and increasing access to a broader range of export markets. Upward pressure on the rating could develop as a result of ongoing and effective reforms that sustainably raise domestic savings, including lifting public saving which helps curtail the fiscal deficit and reduce external vulnerability. Measures that bolster the resilience of the banking system further would also be credit positive.
Finally, economic reforms that foster greater economic diversification and higher productivity growth over time would raise Georgia's economic strength and potentially support the rating.
Downward pressure on the rating could develop from an increase in external vulnerability risks, notably a widening gap between domestic savings and investment, or an escalation of political risks. A sustained deterioration in fiscal metrics could also put downward pressure on the rating. This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis.