Georgia’s Economic Perspective is ‘Down But Stable’
01 May, 2015
Georgia’s Economic Perspective is ‘Down But Stable’
On April 17, the international rating agency Fitch changed its outlook on Georgia’s long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive and rated the IDRs at “BB-”. However, the Georgian government claims the rating has not worsened and does not hurry to correct the state budget spending.

“The report should’ve been way more critical,” says President of New Economic School Paata Chechelidze who doesn’t find the Fitch assessment comprehensive. He claims that it exaggerates the
role of external factors and glosses over the role of internal negative factors that have also dealt a big blow to Georgian economy.

According to Fitch experts, the external sector remains Georgia’s main weakness. The key reasons for Georgia’s downgrade were the multiple external shocks affecting Georgia. They followed the lower oil price/sanctions-induced downturn in Russia. The Russian economic crisis spilled over to surrounding CIS economies, triggering a wave of currency devaluation in trading partner countries. These developments have had a highly adverse impact on Georgian trade and remittances: Exports have fallen sharply, while remittances are down about 25 percent and Georgia’s national currency has depreciated against the USD by about 30 percent from its 2011-13 levels.
The depreciation will also push net external debt up from 58 percent of GDP in 2014 to nearly 80 percent in 2015, far above the “BB” rating median of 15 percent. Economic growth is expected to slow markedly to 2 percent in 2015 from 4.8 percent in 2014, primarily due to spillovers from the regional economic downturn. Fitch predicts the 2015 general government deficit reaching about 3.5 percent of GDP. Georgian analysts fear this means more foreign debt for the Georgian state.
Paata Sheshelidze, President of New Economic School, thinks the Fitch downgrade is quite mild and that it could actually be far harsher. According to him, one of the key messages of the Fitch report is that it questions the capability of the Georgian government to pay off debts.
The point is that according to Georgian law, the critical level of foreign debt for the government is 60 percent of GDP. The latest statistic suggests that it already reaches roughly 40-45 percent. However, the currency depreciation increases the risk of the share of foreign currency-denominated debt nearing its limits this year.
“The depreciation of the lari will push general government debt above 43 percent of GDP in 2015. Despite the high share of concessional or near-concessional debt, debt dynamics remain vulnerable to further exchange rate developments,” the Fitch analysis states.
Sheshelidze believes the Fitch experts think that the state spends too much and if this goes ahead, it will need to take out more loans. On the other hand, he doesn’t find the Fitch assessment comprehensive. It exaggerates the role of external factors and glosses over the role of internal negative factors that have also dealt a big blow to Georgian economy.

“The Georgian government introduced tax remissions for Georgian car exporters only a couple of days ago – This is delayed action at its finest.”

“The report should’ve been way more critical. For instance, they say the major problem was external factors, but the external factors were not all negative. By that I mean that some products we import, such as oil and sugar, have become cheaper. On the other hand, some negative internal factors were not taken into consideration at all. These factors include increasing of budget, excise and share of state programs, as well as business being replaced by state bureaucracy,” Sheshelidze elaborated.
But the major defect of Fitch analysis is its full support of the National Bank’s policy. Sheshelidze, on the contrary, believes that the bank has played a negative role in the depreciation of national currency.
“The NBG put fuel on the fire when it issued a big emission of money in December and boosted the currency’s devaluation. Besides, its reaction to the unfolding events was delayed and insufficient. The Georgian government also failed to undertake timely actions to diminish the external risks. For instance, Azerbaijan prohibited the import of cars that were produced before 2005. We knew it would happen long before this law took effect, but the Georgian government’s reaction to this amounted to zero [even though car re-export tops Georgia’s total exports – Ed.]. It introduced tax remissions for Georgian car exporters only a couple of days ago – This is delayed action at its finest. There were many other factors as well, and now we are witnessing the results of apathy and inactivity. If all this was taken into account by Fitch, they might have not just revised expectations but actually cut Georgia’s rating further down,” Sheshelidze claimed.
Soso Archvadze, an economic analyst, does not find Fitch rating downgrade as scary, however.
“This is merely a prognosis, not reality,” he says. “It doesn’t mean that the state debt will cross the critical level of 60 percent. The point is that we are paying off more liabilities than we are taking. Besides, we cannot physically take enough in loans to cross that boundary. The state debt is around 5 billion USD – it is roughly 40-45 percent of GDP at the moment, with the total GDP being 16 billion. To reach 60 percent of this in 2015, we need to borrow several billion, and such an amount of money is impossible to spend in a small economy like ours. We barely spend a billion in investments annually.”
Nevertheless, Archvadze acknowledges that due to currency depreciation, the Georgian government may face a need for new loans. And since its economic outlook was downgraded, the loans may become more expensive. But he does not think the negative revision of expectations by Fitch will turn investors off.
“It’s the other way around, actually: Depreciation of the lari may attract foreign investors because this cuts business operation costs here,” Archvadze concludes.

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