On Aug. 26, 2022, S&P Global Ratings affirmed its 'BB/B' long- and short-term foreign and local currency sovereign credit ratings on Georgia. The outlook is stable.
"The stable outlook balances Georgia's strong ongoing economic recovery against its relatively weak external position, on a stock basis, and elevated regional security and geopolitical risks, which we expect will persist over the next 12 months", - the report reads.
According to the document, the ratings are supported by Georgia's relatively strong institutional arrangements, particularly compared with Commonwealth of Independent States peers, as well as by Georgia's largely floating exchange-rate regime and the availability of timely, concessional financing from international financial institutions.
S&P writes, that main factor driving Georgia's economic upswing is the significant inflow of migrants since the start of the Russia-Ukraine conflict. Arrivals from Russia, Ukraine, and Belarus have increased substantially, with Russians accounting for by far the largest proportion. Anecdotal evidence suggests that migrants leaving Russia for Georgia are mostly professionals who are able to work remotely and are escaping Russia's domestic political risks as well as the restrictive effects of global sanctions. In some cases, businesses have been re-registered in Georgia.
"Georgia's economic growth has strengthened substantially this year. According to monthly real GDP estimates, over the first six months output expanded by 10.5% compared to the same period in 2021. This contrasts with our previous expectation that the Russia-Ukraine conflict would pose substantial near-term risks to Georgia's economic performance given its geographic, trade, and energy links with Russia. Although we expect the momentum to slow in the second half of 2022, we are revising upward our full year growth projection to 8% from the 4% projection we published in July (see "Sovereign Risk Indicators," published July 11, 2022) and the 5% we expected before the conflict broke out (see "Georgia Outlook Revised To Stable On Stronger Growth And Moderating External Imbalances; 'BB/B' Ratings Affirmed," Feb. 26, 2022). We also note that this year's strong growth comes after an already quick post-pandemic rebound during which output expanded by 10.4% last year, following a 6.8% contraction in 2020", - the report reads.
As S&P notes, albeit declining in recent years, Georgia has historically received substantial money transfers from Russia. Transfers from abroad are important support for Georgia's current account, amounting to around 12% of GDP last year, 17% of which originated in Russia (4% combined in Ukraine and Belarus). Other key sources of foreign money transfers for Georgia are Italy (16% of the total in 2021), the U.S. (12%), and Greece (10%). Early sanctions on a range of Russian financial institutions, and the Russian government's own capital controls, have disrupted some money transfer channels to Georgia. Nevertheless, personal money transfers to Georgia from Russia have grown substantially since March. In May these were more than 10 times higher compared to January-February. The transfers have been moderating through June-July but still remain significantly above historical levels.
Georgia's direct trade exposure to Russia and Ukraine is also important. At the onset of the conflict goods exports to Russia constituted 14% of the total, while this proportion was 7% for Ukraine and just 1% for Belarus. Key items exported to both Russia and Ukraine were so-called traditional Georgian exports such as wine, mineral water, and agricultural products. Additionally, there have been sizable exports of ferroalloys into Russia and used-car re-exports into Ukraine. Available monthly goods trade data suggests that in nominal U.S. dollar terms goods exports to Russia and Ukraine collapsed in March as the conflict started but have since somewhat recovered. Over March-June there was a combined 16% drop year-on-year in exports to Russia and almost 60% to Ukraine.
Exports to other destinations have more than compensated for this loss, with the overall nominal value of Georgia's goods exports rising by over 30% year-on-year in the first six months of 2021. The authorities estimate that much of this increase is due to favorable price developments while volume growth has been more modest. Nevertheless, this helps offset the impact of an increase in import costs given that Georgia is a net energy importer and is therefore facing significantly higher prices for oil and gas imports, which mostly come from Azerbaijan and Russia.
Beyond the inflow of visitors from Russia, Georgia's wider tourism sector has also been growing following a sharp pandemic-driven decline in 2020. Excluding Russia, Ukraine, and Belarus, income from foreign travel totaled almost $1 billion in January-July 2022, which is 3x 2021 levels and 20% below the corresponding period in 2019. S&P expects tourism to continue to recover, with the sector reaching 80-90% of 2019 levels in terms of foreign currency earnings this year and fully recovering next. Inflows of tourists and migrants have also notably increased rental and real estate purchase demand, contributing to a rise in rental costs and property prices.
Despite the unexpectedly favorable short-term economic developments since the start of the Russia-Ukraine conflict, the outlook beyond 2022 is less certain with a number of downside risks. First, it remains unclear how many recent migrants will stay in Georgia for the longer term and how many will relocate to other destinations or return home. Georgia could also suffer from the effects of higher energy prices, inflation, and the rapid pace of monetary policy tightening around the globe. One possible transmission channel is cost-of-living pressure in Europe; given that around 10% of visitors to Georgia originate from the EU, pressures on disposable incomes could reduce consumers' purchasing power and potentially weaken demand for foreign travel. S&P therefore expects growth to slow next year to 3%, from 8% in 2022.
"In our view, Georgia's institutional settings are generally stronger than those in other countries in the region. The country has implemented key reforms in the 2000s, resulting in significant improvements in institutional checks and balances, quality of governance, and ease of doing business. We also consider that macroeconomic policymaking has been comparatively strong and has benefited Georgia over the past few years",- the report notes.
