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Resume: The Fitch credit rating agency has upgraded Georgia’s rating position from BB- positive to BB stable. A country’s credit rating gives investor information in regard to the risk factors associated with investing in a certain country as well as to that country’s reliability. Georgia’s BB rating means that despite the progress achieved, the conjecture still remains unfavourable. In the BB assessment category, the risks of default are relatively high and financial stability is sensitive vis-à-vis a negative economic and political fluctuation. However, there is still financial flexibility. In accordance with the Fitch assessment, the issue of the occupied Abkhazia and Samachablo remains as a significant risk.

In regard to Georgia’s progress in the region, Hungary, which with Georgia also belongs to the grouping of the Eastern Europe and Central Asia Region, also saw its rating improve from BBB- to BBB. Therefore, we are not the only country in the region whose indicators have improved.

As for the reasons stipulating Georgia’s progress in the credit rating, of note is that of the 190 countries in the list, Georgia has moved from the 9th to the 6th position in the World Bank’s annual rating on doing business. However, the part of the Prime Minister’s statement where he claims that Fitch “very positively” assessed the creation of the pension fund is inaccurate. Fitch’s report underlines that the pension reform would contribute to saving and the existence of saving reduces the risks of default. This is a simple fact and a positive or a negative assessment of this fact would entail making an ideological component from which rating companies usually refrain.

In accordance with Fitch’s calculations, the current account deficit in 2018 is 7.5% of Georgia’s GDP which indicates a reduced burden on the economy. The report also indicates that the Georgian economy was resilient throughout 2018, the banking sector was successful, there was a growth of capitalisation and asset quality, and liquidity was high which are in line with Mamuka Bakhtadze’s statement. However, the report also indicates that the deposit dollarisation figure was high and amounted to 64.4% as of November 2018. This contradicts the other part of Mr Bakhtadze’s statement where he speaks about the larisation strategy as being correct. This contradiction is further corroborated by the failure of the so-called one-off larisation programme which was implemented between 17 January and 24 March 2014.

Analysis

On 22 February 2019, the Fitch credit rating agency upgraded Georgia’s rating position from BB- positive to BB stable. In regard to this decision, the Prime Minister of Georgia, Mamuka Bakhtadze, stated: “In accordance with the current data, we are the only country in the region which progressed in the Fitch ratings. The contributing factors are the sixth position in the doing business ranking and a resilient economy where I have to mention a successful larisation programme. We reduced the current account deficit. Fitch positively assessed the creation of the pension fund.”

A country’s credit rating gives investor information about the risk factors associated with investing in a particular country as well as its reliability. Credit ratings are published by dozens of agencies. Of these agencies, however, the most influential and world famous are three big credit rating agencies – Standard & Poor (S&P), Moody’s and Fitch. Each credit rating agency follows its own methodology although the basic indicators which they take into account are the same. These include the foreign and domestic policies of a country as well as regional processes and the environment.

The Fitch credit agency’s rating positions are assigned in accordance with the Latin alphabet letters – from the lowest D to the Highest AAA. The AAA is the highest assessment which is followed by AA+, AA, AA-, higher than average A+, A and A-, lower than average BBB+, BBB and BBB-, non-investment speculative BB+, BB and BB-, speculative B+, B and B-, significantly risky CCC+, highly risky CCC, default with positive outlook C and default DDD, DD and D. These ratings are hierarchically given in Table 1. Of note is that the ratings are divided into investment and non-investment grades which are also presented in Table 1. Georgia’s assessment – BB – belongs to the non-investment grade; that is, the conjecture still remains unfavourable despite the progress attained. Together with the actual rating, the outlook of the rating is also important. The outlook could be negative, stable or positive and indicates the expected change in the rating in the nearest future.

Table 1: Fitch Credit Agency Investment Scale

Investment Grade

AAA

The best investment environment, stable and reliable

AA

Good investment environment, higher risk as compared to the AAA category

A

Economic situation can affect debtor solvency

BBB

Medium investment environment, satisfactory at the moment

Non-Investment Grade

BB

There are speculative risks in the economy

B

Financial situation varies noticeably

CCC

Conjecture is vulnerable and dependent on favourable economic conditions

CC

Highly vulnerable and very speculative conjecture

C

On the verge of bankruptcy

D

Default

NR

Not publicly rated

Source: Investopedia.com

In the case of a BB assessment, which is Georgia’s current assessment, the risk of default is relatively high and financial stability is sensitive vis-à-vis a negative economic and political fluctuation. However, there still is financial stability. The problem of Abkhazia and South Ossetia remains as a significant risk. Fitch assessed Georgia’s credit rating in July 2007 for the first time when the country was given a BB- rating with a stable outlook.

Table 2: Georgia’s Assessment Dynamic in Fitch Ratings

Date

Rating

Outlook

18.07.2007

BB-

Stable

08.08.2008

B+

Negative

07.04.2009

B+

Negative

26.08.2009

B+

Stable

03.03.2011

B+

Positive

15.12.2011

BB-

Stable

17.10.2014

BB-

Positive

20.04.2015

BB-

Stable

16.03.2018

BB-

Positive

22.02.2019

BB

Stable

Source: www.tradingeconomics.com/georgia/rating

The part of the Prime Minister’s statement where he claims that Georgia is currently the only country in the region which has progressed in the Fitch rating is unclear. The Prime Minister has not specified what countries he meant in a region. It is appropriate to clearly define the region where Georgia belongs and this is relevant for comparison. In accordance with the World Bank’s methodology, the group of European and Central Asian countries (excluding the high-income countries) constitutes such a region. The countries in this group have more or less identical economic characteristics. The ratings of these countries are given in Table 3. Hungary’s rating has also improved (from BBB- to BBB) together with Georgia’s.

Table 3: Assessment of Regional Countries in the Fitch Ratings

Russia

BBB-

Armenia

B+

Turkey

BB

Azerbaijan

BB+

Ukraine

B-

Belarus

B

Serbia

BB

Romania

BBB-

Turkmenistan

CCC-

Uzbekistan

BB-

Poland

A-

Moldova

B-

Hungary

BBB

Kazakhstan

BBB

Bulgaria

BBB

Croatia

BB+

Macedonia

BB

Bosnia-Herzegovina

NR

Montenegro

NR

Tajikistan

NR

Kyrgyzstan

NR

Albania

NR

Source: fitchratings.com

In regard to the Prime Minister’s assessments: In the World Bank’s annual ranking of Doing Business 2019, Georgia has indeed made progress from among the 190 countries and moved from the 9th to the 6th position. The Doing Business report claims that it is easier to do business today in the former Soviet Republic of Georgia as compared to the UK or the US. This success is also underlined in the Fitch report. The part of the Prime Minister’s statement where he claims that Fitch “very positively” assessed the creation of the pension fund is political speculation. The Fitch ratings indicate that the pension reform would contribute to saving and the existence of saving reduces the risk of default. This is a simple fact and to give this fact either a positive or a negative assessment would entail making an ideological component from which rating companies usually refrain. The aforementioned passage from the Fitch report concerns a specific aspect of the pension reform which is the creation of savings in the country. The other aspect of the pension reform is not of a rating company’s interest.

In accordance with the report, the Georgian economy was resilient throughout 2018. However, it also indicates that the deposit dollarisation figure was high and amounted to 64.4% as of November 2018. This contradicts the other part of Mamuka Bakhtadze’s statement where he speaks about the larisation strategy as being correct. For reference, issuing loans to individuals in amounts less than GEL 100,000 and in a foreign currency has been banned since 1 January 2017 and Georgian nationals and Georgian-based legal entities can get loans in amounts less than GEL 200,000 only in the national currency beginning from 23 January 2019. Working to address the negative consequences of GEL depreciation, the Government of Georgia also introduced a one-off larisation programme which was implemented from 17 January to 24 March 2014. It can be said that this programme failed (see FactCheck’s research).

In accordance with Fitch’s calculations, Georgia’s current account deficit to GDP ratio is 7.5% for 2018 which indicates a reduced burden on the economy. Currently, the data for only the first three quarters of 2018 have been published for the balance of payments. In the third quarter of 2018, the current account was in surplus for the first time in the history of independent Georgia. In 2010-2017, the current account deficit to GDP ratio was nearly 10.8% whilst it reached a positive level of 0.3% of the GDP in the third quarter of 2018 when the current account surplus was approximately USD 12 million(see FactCheck’s research).