Standard & Poor’s revises the Government of Georgia outlook from “positive” to “stable”

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Standard & Poor’s has revised the Government of Georgia outlook from “Positive” to “Stable” because of growing geopolitical risks. The long- and short-term sovereign ratings have been left unchanged at B+ and B, respectively, reports S&P.

S&P notes that growing geopolitical risks in the region may have a negative effect on external liquidity, investors’ moods and economy growth. These risks are partly neutralized by high economic prospects, quick economic reforms, well-balanced tax and budget policies and enlarging economic structure.

The effective efforts of the Georgian Government to increase state incomes will keep budget deficit increasingly low: 2.6% of GDP in 2007, 2.2% in 2008 and 2.0% in 2009. High GDP growth and successful privatization will substantially reduce the net foreign debt to 20% of GDP in 2007 and 16% in 2008. Just to compare: in 2003 this index was 57% (before the Paris Club’s decision to ease Georgia’s debt burden); in 2006 the average index for the B group was 44%.

At the same time, S&P notes that Georgia’s ratings are curbed by growing geopolitical risks, relatively high inflation, poorly developed financial sector and narrow economic structure. Georgia’s low external liquidity has been made even lower by worsening relations with Russia, the country’s traditional trade partner. As a result, Georgia’s external liquidity is worse than the average index for the B group. Russia’s trade embargo and the Oct 2006 rise in Gazprom’s gas tariffs will increase Georgia’s current deficit to 15% in 2007 from 11% in 2006 and 8.8% in 2005. In 2006 the demand for net foreign financing made up 121% of the volume of current revenues and accessible reserves against average 108% for the group.

The monetary-credit indices are also low: in 2006 inflation will rise to 8.5%, following growing internal crediting and substantial capital inflow. The Central Bank of Georgia is working out monetary-credit instruments — but not very effectively because of pressuring prices and poorly developed financial sector. The economy is not developing despite good prospects for growth. $1,700 per capita GDP in 2006 is low.

Progress depends how effectively Georgia will develop its markets, improve its business environment, fight corruption and reinforce its judiciary. In 2006 Georgia received high mark for its reforms: on the Ease of Doing Business list it jumped from 112^th to 37^th rank. This shows that the Georgian Government is consistent in solving problems. “Stable” Outlook reflects Georgia’s well-balanced tax and budget policies and successful reforms but, on the other hand, implies problems in foreign economy, growing geopolitical risks and substantial demand for growth.

Georgia’s problems with Russia and the increasingly tense situation in Abkhazia and South Ossetia may continue to shatter the external liquidity, disappoint the investors and slow down the economy growth. S&P says that if Georgia copes with the risks, its outlook will be revised to “Positive.” If the country succeeds in institutional and infrastructural development, its rating will be raised, but if it fails to improve its foreign economic and tax-budgetary indices or to curb inflation, the rating will be lowered.

Georgian Finance Minister Aleksy Aleksishvili says that S&P outlook is quite objective. He notes that the fact that Georgia’s ratings were left unchanged now that the country is facing negative external factors, particularly, Russia’s political and economic pressure, shows that the reforms of the Georgian Government are quite effective. “Despite the economic shock following Russia’s sanctions, Georgia’s GDP will grow by 7.5% in 2007. Russia’s political and economic pressure, particularly, the expected rise in the gas tariff for Georgia, will not hinder the economy growth and reforms in our country,” says Aleksishvili.