Georgia Is Resilient to Fiscal Risks
11 October, 2012
Georgia Is Resilient to Fiscal Risks

Georgia is fiscally resilient to external shocks in the coming 3 years inasmuch as the state debt of the country remains beyond the critical level, PMCG research center concluded, on the basis of testing the hypothetical shock scenarios.   Gross external debt of Georgia to GDP ratio for the last four quarters (period from the third quarter of 2011 up to the second quarter of 2012) amounted to 78.7 percent and 94.2 percent of the Gross External Debt of Georgia

is denominated in foreign currency, National Bank of Georgia informed on October 2, 2012.

Gross External Debt of Georgia by June 30 of 2012 amounted to USD 12 billion of which USD 3.9 billion or 32.2% is public sector debt and USD 706 million or 5.9% is the debt of the NBG, USD 2.1 billion or 17.3% comes with the banking sector’s debt, USD 2.5 billion [20.6%] makes the other sector’s debt and USD 2.9 billion or 24 % is intercompany lending.

Fiscal stability is an essential precondition for sustainable economic development of any country and the increasing debt figures makes sector pundits incline to analyze  how fiscally resilient is Georgia toward external fiscal risks in the face of the impending second tide of economic crisis.

The financial crisis of recent years when even developed countries faced default made clear that the preliminary research and assessment of fiscal resilience of the country is crucial. To test Georgia’s fiscal resilience toward possible negative challenges the PMCG experts decided based on two hypothetical stress models: reduction of the share of tax incomes in the GDP and increase of the state debt to the GDP. These are the key major fiscal risks to Georgia as far as tax income makes 84% of the state budget while according to the Act of Economic Freedom, the budgetary deficit of 2012 should not exceed 3%, budgetary expenses - 30% of GDP and the state debt must be kept under 60% of GDP. Moreover, based on the similar law, government cannot increase the common state taxes without calling for the referendum. PMCG decided to research how realistic the parameters built in the Economic Freedom Act can be.

First and foremost the research focused on possible deterioration of three major influential macro-economic factors such as real growth rates of GDP, inflation and currency. According to the forecast data of the Ministry of Finances of Georgia, the economic growth rate in 2012-2016 stands at 6-7% tentatively. PMCG researched what happens if economic grow slows down in 2015-2025, the targeted inflation will slip from the currently active 6% [fixed for 2012-2015] to 2% within 2016-2025, and Georgian national currency [that stands at GEL 1.65 against USD1 at the moment] will devaluate rapidly.

Currency devaluation presumption is essential inasmuch as 82% of Georgian state debt comes with the foreign debt and devaluation of national currency may enhance the foreign debt volume and the fee paid for the debt service calculated in the US dollars.

The research group came to conclusion that in pursuance with the methodology of the International Monetary Fund (IMF), Georgian fiscal resilience falls in the low risk group as far as the state debt burden is less than other criteria and do not reach critical levels during the 3-year shocks.

The test scenarios showed that the 3-year shock to GDP growth cannot affect the fiscal resilience of the country and the debt service terms as well as long-term macro-economic stability indicators do not deteriorate significantly. Even if national currency devaluates by 50% thus triggering the rapid growth of the state debt volume its share may reach just 40.5% of GDP by 2013. The most troublesome can be the combined shock of three major macro-economic indicators: when the economic growth reduces, budgetary deficit increases and the national currency devaluates simultaneously - this seems to be the most realistic scenario to PMCG experts likewise the crisis in 2009-2010 rather than development of the said shocks separately. This combined shock test showed that if it occurs in 2013-2015 the Georgian state debt share will get closer to critical level by covering 50% of GDP. However, the solvency capacity remains below the critical levels: the share of the debt service fee against the export and the budgetary income volume increases to 10% and 17% respectively while the critical levels stand at 25% and 35%.

Although the state debt of Georgia is far below the critical level [it makes 33% of GDP by 2012] and the budgetary system of the country is reliable one should always remember that the gross foreign debt of Georgia is USD 12 billion that has an influence on international credit ratings of the country, the PMCG reminds. It accentuates that these credit ratings define the interest rates for future liabilities Georgia may take at international market as well as the access and the price of financial sources for financing the state budgetary deficit. Moreover, if the private sector faces insolvency problems against their foreign liabilities the state would be liable to solve the problem in order to detain economic stability of the country.

By far Georgia is able to retain the fiscal sustainability in both middle-term and long-term prospects if it insures proper fiscal management, PMCG believes. PMCG recommends not to use the 3% cap limit of budgetary deficit [only in emergency case] and undertake the very well  balanced state budget [with precise forecasts on incomes and expenses] that lays ground to fiscal resilience of the country and encourages economic development at large that means no extra state debts.

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