OREANDA-NEWS. Signing of the Association Agreement with the EU will be a positive long-term development for Georgia's sovereign credit profile, but it does not have an immediate impact on our ratings assessment, which remains focused on the nearer-term prospects for external finances and economic growth, Fitch Ratings press release reads.

As it is pointed out in the document, in time, the Association Agreement, which includes a Deep and Comprehensive Free Trade Area (DCFTA) agreement covering trade in goods including energy and services, will open up EU markets for Georgia's exporters, potentially boosting growth. In 2012, an EU-commissioned study said that, if implemented and sustained, the DCFTA could increase exports to the EU by 12%, and imports by 7.5%. In the long run, it could boost national income by EUR292million.

The agency already factors strong growth potential into its assessment of Georgia's creditworthiness. The country's GDP growth rate slowed sharply in 2013 due to under-execution of large public investment programmes, but renewed investment growth should help growth to average 5% in 2014 and 5.5% in 2015," reads the press release.

Improvement of relations with Russia boosted exports in 2H 2013, which combined with the slowdown in import-intensive investment helped Georgia's current account deficit (CAD) to narrow sharply. But we think structural weaknesses of the export base and the need to import essential goods will keep the CAD well above the 'BB' category median, although it should shrink gradually from 2014. The government forecasts the CAD to remain above 7% of GDP until 2017.

While the lifting of Russian embargoes on some products, such as wine, boosted exports last year, the long-term benefits may be limited as Russia receives a small share of Georgia's goods exports, and accounted for just 3% of net FDI in 2009-2013. This should, however, limit the impact of a Russian economic slowdown on Georgia's growth prospects. It is not yet clear what action if any Russia will take in response to the Association Agreement, but relations have improved under the Georgian governments of Bidzina Ivanishvili and Irakli Gharibashvili.

The chief driver of Foreign Direct Investments (FDI) in the near term is likely to be the recent launch of the Georgian Co-Investment Fund, in which billionaire and former Prime Minister Ivanishvili is the main shareholder. This could see FDI grow substantially. Further improvements in the CAD and in FDI inflows should boost foreign-exchange reserves, reducing external vulnerability and supporting exchange rate stability.

The Association Agreement is also positive in providing a policy anchor for structural reform. Georgia has already adopted a new competition law and the authorities are planning labour market reform to meet EU requirements. The experience of other countries that have signed Association Agreements suggests that they do promote structural reform, although this can be uneven - it may be more focused on institutional than economic reforms, for example.

Fitch affirmed Georgia's sovereign rating 'BB-' with Stable Outlook on 9 May. The rating agency's next scheduled review is on 17 October.