Scope Ratings GmbH, a renowned Germany-based rating agency, has made significant changes to the Republic of Georgia’s credit ratings and outlooks, reflecting various rising risks. The agency affirmed Georgia’s long-term local- and foreign-currency issuer and senior unsecured debt-category ratings at BB, but the associated outlooks have shifted from Stable to Negative. The short-term issuer ratings maintain their S-3 designation in both local and foreign currency with stable outlooks. This adjustment in outlook has been driven by growing concerns about institutional, geopolitical, and external-sector risks that could adversely impact Georgia’s credit standings.
The decision to revise Georgia’s outlook to Negative highlights several escalating concerns, including the weakening of democratic institutions, increased civil instability, heightened sanctions risks, and greater geopolitical sensitivities. Further contributing to this revised outlook are the suspension of Georgia’s International Monetary Fund (IMF) program, the passage of the “foreign-agent law” earlier last year, and issues regarding the legitimacy of recent parliamentary and presidential elections. These factors collectively underscore the complex and multi-faceted challenges facing Georgia’s creditworthiness.
Weakening Democratic Institutions and Rising Civil Instability
Scope’s evaluation underscores a clear deterioration of democratic institutions in Georgia, a nation once celebrated for its strong record of democratic transitions post the Rose Revolution. However, recent years have marked a noticeable shift towards democratic backsliding, primarily driven by the growing influence of Russia within the ruling Georgian Dream (GD) government. This democratic regression is evident through several disruptions and strains on institutional frameworks.
There has been an alarming expansion of state controls, marked infringements on civil society and the independent press, contested electoral processes, and increasing doubts about the judiciary’s independence. The imprisonment of former Georgian President Mikheil Saakashvili and severe crackdowns on pro-European Union demonstrations are vivid examples of this backpedaling. Additionally, the actions undertaken to stifle political opposition further accentuate the backsliding of democratic norms in the country.
A specific case illustrating this decline is the adoption of the foreign-agent law by the Georgian parliament on 28 May 2024. This legislation targets entities receiving foreign funding, which has led to a repression of critical voices and limitations on free speech, consequently bolstering the ruling government’s electoral prospects. Parliamentary elections, which saw Georgian Dream securing 89 of the 150 seats, were marred by numerous irregularities such as ballot-stuffing, bribery, and pressure campaigns, all of which were noted by international observers and led to a large-scale boycott of parliamentary mandates by opposition members. Reports of Russian interference during the elections have only fueled further uncertainty around their legitimacy.
Furthermore, the legitimacy of the current government is under questioning due to the Georgian Dream’s re-election, subsequently appointing Mikheil Kavelashvili as the nation’s president, replacing the pro-European Salomé Zourabichvili. However, Zourabichvili continues to assert her legitimacy, escalating a constitutional crisis within the nation.
Increased Geopolitical Risks
Another major concern identified by Scope is the rise in geopolitical risks for Georgia following Russia’s full-scale invasion of neighboring Ukraine. This aggressive move by Russia has not only deteriorated regional stability but also placed significant contingent risks on Georgia, particularly if its government were to adopt a pro-West stance and pursue EU and NATO accession.
Georgia’s geographical proximity to Russia, coupled with latent tensions surrounding the separatist regions of Abkhazia and South Ossetia, poses a considerable risk of conflict re-escalation, reminiscent of the 2008 war against Russia. The parliament of South Ossetia mulling over a referendum to join Russia accentuates these geopolitical tensions further. As a result, Georgia is now perceived as the most geopolitically at-risk sovereign among the 40 governments rated by Scope after Ukraine.
Adding to these geopolitical complexities is the potential re-election of figures like Donald Trump in the United States, whose foreign policy stance could potentially intensify geopolitical risks for Georgia. Such developments paint a complicated picture for Georgia’s geopolitical stability, underscoring the pressing need for prudent diplomatic and strategic maneuvering.
External Sector Risks
Scope’s analysis points to increased external sector risks, marked by reduced reserves, exchange-rate volatility, and diminished access to the IMF. Although Georgia’s official reserves had partly recovered to USD 4.4 billion, they remain below the August 2023 peak of USD 5.4 billion. The central bank’s interventions in foreign exchange markets during periods of sharp sell-offs, particularly around the time the foreign-agent law was passed, indicate a fragile external sector environment. Coverage of short-term external debt has moderated significantly, dropping to 0.99x from its 2021 peak of 2.12x.
The previously robust relationship with the IMF has strained, particularly after the USD 280 million precautionary Stand-by Arrangement, signed in June 2022, was suspended. This suspension, driven by concerns over central bank independence following specific rule changes, aimed to shield a pro-Russian former chief prosecutor from American sanctions. Georgia’s vulnerabilities, stemming from its small economy, reliance on external financing, and significant dollarization, are exacerbated by these developments, reducing resilience due to curtailed external-sector buffers and suspended access to last-resort lenders.
Macroeconomic Stability and Growth
Despite the challenges outlined, Georgia’s BB long-term ratings benefit from several positive factors. Chief among them is the nation’s moderate public debt level and a declining sovereign debt trajectory, underpinned by a solid track record of adhering to EU-like fiscal rules. This fiscal prudence has contributed to medium-term debt sustainability, with the general government deficit expected to hover around 2.1% of GDP in the coming years.
Scope anticipates that the general government debt ratio will gradually decline from an estimated 38.9% at the end of 2024 to 34.4% by 2029. This anticipated reduction is supported by strong forecast nominal growth and historically prudent fiscal policies. Additionally, over two-thirds of Georgia’s government debt is on concessional loan terms due to past engagements with the IMF and other international donor institutions. This debt structure provides relatively long maturities and moderates the interest-payment burden, enhancing the nation’s economic resiliency.
Georgia’s economy continues to demonstrate robust growth potential, with an estimated annual growth rate of 5% in the medium term. Recent growth rates have surpassed this trend, fueled by strong service sector exports, financial inflows, and an influx of skilled workers from Russia, Belarus, and Ukraine. Inflation has remained relatively stable, with the National Bank of Georgia maintaining a prudently tight policy stance, further supporting macroeconomic stability.
Rating-change Drivers and Future Scenarios
Scope’s decision to revise Georgia’s outlook to Negative is driven by several key risk factors and potential scenarios.
Upside Scenarios:
- Reversal of institutional and democratic weakening, leading to moderated civil and political instability, and reduced sanctions risks.
- Easing of geopolitical and security risks.
- Reduction in external-sector risks, such as decreased structural current-account deficits and re-accumulation of foreign-exchange reserves.
Downside Scenarios:
- Further deterioration of democratic institutions, heightened civil instability, increased sanctions risks, and elevated political instability.
- Escalation of geopolitical risks with significant adverse long-term implications.
- Increased external vulnerabilities impacting reserve adequacy and external debt repayment.
- Weaker-than-expected nominal growth and looser budgetary discipline affecting the medium-run public-debt trajectory.
Sovereign Rating Methodology
Scope’s rating process incorporates both quantitative and qualitative assessments. The Sovereign Quantitative Model (SQM) evaluates Georgia’s core sovereign credit fundamentals, initially signaling a ‘bbb+’ rating. However, a one-notch negative adjustment on political-risk grounds results in a ‘bbb’ quantitative rating. This rating undergoes further review through the Qualitative Scorecard (QS), allowing adjustments based on relative strengths or weaknesses.
ESG Factors
Environmental, Social, and Governance (ESG) issues are crucial in Scope’s rating methodology. Georgia faces significant environmental risks, including high urban air pollution and a dependence on imported energy. Social challenges include elevated poverty, structural unemployment, and a weak social safety net, although skilled-labor inflows from Russia have somewhat mitigated demographic challenges. Governance concerns remain prominent, evidenced by the suspension of Georgia’s EU candidate status related to the foreign-agent law.
Conclusion
Scope’s rating process involves both quantitative and qualitative evaluations to determine sovereign credit ratings. The Sovereign Quantitative Model (SQM) plays a pivotal role in this evaluation, assessing fundamental factors critical to Georgia’s sovereign credit status. Initially, the SQM assigns Georgia a ‘bbb+’ rating based on its core credit metrics. However, due to political-risk considerations, the rating is adjusted one notch downward to ‘bbb’.
This quantitative rating is then subjected to further scrutiny through the Qualitative Scorecard (QS). The QS allows analysts to make additional adjustments to the rating by considering Georgia’s relative strengths and weaknesses that may not be immediately apparent in the quantitative model. Therefore, while the SQM provides a foundational rating, the QS offers a nuanced review that can lead to either an upward or downward adjustment based on a broader contextual understanding.
The combination of these two methodologies ensures a comprehensive and balanced evaluation of Georgia’s sovereign creditworthiness. By incorporating both numerical data and qualitative insights, Scope aims to provide a rating that accurately reflects Georgia’s financial health and geopolitical environment.
