Domestic Institutional Risks Weigh On Credit Outlook

As the Georgian Dream government seeks to square the circle – seeking closer ties for security reasons with the European Union and, in parallel, with Russia – an increasing influence of Russia within policy making elevates institutional challenges.

Recent elections have brought accusations of vote rigging. The October-2024 general elections are fast approaching, and a rift between the government and the nation’s pro-EU president Salomé Zourabichvili weighs on the coherence and credibility of EU-accession aims. Imprisoning pro-EU ex-President Saakashvili has attracted global disapproval even as a Kremlin-inspired foreign-agents law was dropped last minute only following meaningful protests.

From an economic perspective, Georgia’s historical advantages stemming from a strong relationship with the International Monetary Fund have recently waned. A precautionary USD 280m Stand-by Arrangement has been on hold since the middle of last year following questions concerning central-bank independence after changes shielding a pro-Russian former chief prosecutor from US sanctions.

Economic Out-performance And Fiscal Trajectory Support The Outlook

Despite current geopolitical and rising institutional risks, recent exceptional economic out-performance continues to support Georgia’s sovereign credit rating. Contrary to most analysts’ expectations, the war in Ukraine has to-date significantly benefited Georgia economically since 2022 due to significant inflows of labour and skills from the warring nations as well as funds in the form of remittances, transit trade and direct investment. Following growth of an estimated 7.5% last year, the rating agency sees real growth moderating to a still-strong 5.3% this year before converging on medium-run growth potential of 5% by next year.

Strong output growth and a track record of fiscal prudence are anchoring debt sustainability at this stage. Under Scope Ratings’ base-case scenario, public debt is expected to fall under 35% of GDP by 2028, from 39.4% last year and 60.2% at 2020 highs. Government debt has a favourable structure with a long average maturity, modest interest payments, and is primarily owed to the foreign official sector. Even as it reduces rates, the National Bank of Georgia continues its prudent and comparatively hawkish monetary policy, keeping inflation exceptionally low.

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Dennis Shen is Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and primary analyst on Georgia’s sovereign credit rating.