Georgia: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Slight rebound in growth driven by public investment in 2016
While private investment could be hampered by political uncertainty and high interest rates, public investment is likely to continue to be Georgia's main economic driver, thanks to projects funded by multilateral loans: the signing in June 2014 of the Association Agreement (AA) and the Deep and Comprehensive Free Trade Area Agreement (DCFTA) with the EU gives the country access to European funds and Georgia is set to be among the first beneficiaries of loans from the new Asian Infrastructure Investment Bank (AIIB). The infrastructure projects are thus expected to sustain activity in construction as well as services (40% of GDP, especially trade and transport).
Slack demand in Georgia's main trading partner countries is expected to limit exports. Given the country's still strong reliance on Russia, Georgia's growth is likely to remain hampered by the Russian economic situation. The decline in expatriate remittances (12% of GDP), nearly 60% of which comes from Russia, a fairly tight budgetary policy and sustained inflation are likely to limit household consumption.
Price rises are likely to be fueled by higher food and imported energy prices due to the depreciation of the lari. The central bank is nonetheless expected to continue its rate rise policy (raised to 7.5% in November 2015 compared to 4% in January), as a means of preventing runaway inflation.
No deterioration in the public deficit and quasi-stable current account deficit
The budget deficit is not expected to increase in 2016, thanks to spending control in line with the agreement with the IMF in July 2014. Investment is set to remain a priority, it being specified that its financing, mainly through multilateral loans, must not place a great burden on the public finances. Deficit reduction will, however, be complicated by weak growth in fiscal revenues, limited by sluggish activity.
The current account deficit is not expected to decline significantly in 2016. Georgian exports are likely to remain handicapped by an adverse economic context both in the CIS (Azerbaijan, Armenia, Russia), which represents half the country's markets, and in the EU (over 20% of exports). A new embargo by Moscow on Georgian imports, which cannot be ruled out given the tensions between the two countries, would cause further deterioration in the balance. Lower transfers and tourism income, limited by the political uncertainties, are also expected to contribute to the maintenance of a negative balance. The modest rise in imports, along with sustained income levels linked to the transit of oil, should however prevent the deficit from deteriorating further.
Downward pressure on the lari's exchange rate - this fell by almost 20% against the dollar between January and October 2015 - is expected to continue in 2016, especially in connection with the expected hike in US interest rates. Heightened political tensions or worsening relations with Russia would accelerate the lari's depreciation with considerable consequences for public debt levels (almost 75% denominated in foreign currency), as well as for the banks (60% of loans and deposits in USD).
Political tensions are source of instability but governance is on an improving trend
The tensions in the regions which unilaterally declared their independence (Abkhazia and South Ossetia), supported by Russia, are rising with their leaders announced intention of drawing closer to Moscow. Worsening relations between Russia and Georgia over the status of these territories cannot be ruled out.
At national level, the "Georgian Dream" (RG) coalition, which won the parliamentary elections in 2012 and then the presidential elections 2013, against the United National Movement Party (MNU) of the former President Mikheil Saakashvili, is struggling to remain united and retain public trust. Faced with this lack of support, Prime Minister Irakli Garibashvili resigned in late December 2015. Dissensions within the ruling coalition are slowing down the reforms increasing popular discontent, already fueled by disappointing economic performances. Social and political instability may increase between now and the parliamentary elections in October 2016, while the power of the Parliament has been significantly strengthened by the recent amendment to the Constitution.
Georgia is one of the best-ranked CIS countries in terms of governance. Moreover its ranking according to the World Bank indicators is on an improving trend, especially regarding the fight against corruption (52nd out of 215 in 2014 compared with 71st in 2013).