OREANDA-NEWS. October 07, 2015. Fitch Ratings has affirmed Georgia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' with Stable Outlooks. The issue ratings on Georgia's senior unsecured foreign and local currency bonds have also been affirmed at 'BB-'. The Country Ceiling has been affirmed at 'BB' and the Short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS
Georgia's ratings balance the sovereign's weak external finances and low levels of per capita income against the continued commitment by the authorities to move ahead with economic and structural reforms under an IMF programme that was signed in July 2014, as well as strong governance indicators compared with the 'BB' median. Georgia scores much higher than the 'BB' median on World Bank's Ease of Doing Business Index as well as on Fitch's composite governance indicator metric.

External finances remain a key credit weakness. The Georgian lari has depreciated by about 19% since the start of the year against the US dollar. While the floating of the exchange rate has been a shock absorber and somewhat mitigated the decline in reserves, the reserve cover of current external payments remains low, at close to three months. Fitch expects net external debt to rise as a result of the depreciation of the exchange rate to about 72% of GDP by the end of 2015, from about 53% at the end of 2014.

The agency expects the current account deficit to remain well above the 'BB' median. We forecast it to be about 12% of GDP in 2015, compared with the 'BB' median of 2.7% of GDP. Since CIS countries account for nearly 40% of Georgia's exports, Fitch expects exports to contract by about 17% this year. Although lower oil prices will also drive a significant decline in imports, on an overall basis, we expect the current account deficit to widen, albeit by less than our previous forecast.

Fitch forecasts a widening of the fiscal deficit in 2015 over 2014, and expects it to reach about 3.5% of GDP by the end of 2015, from just under 3% of GDP at the end of 2014 given the economic slowdown. The high share of foreign-currency denominated debt in Georgia's public debt, at roughly 80%, is expected to push up gross general government debt to over 41% of GDP by the end of 2015, from about 36% at the end of 2014. However, Fitch believes the IMF programme, which is expected to remain until 2017, will provide an anchor for further progress on structural and economic reforms and should support fiscal finances.

We expect FDI flows to remain relatively strong due to certain large-scale infrastructure projects. However, the high import content of investments will limit their short-term impact on growth. Inward FDI as a share of GDP is expected to remain high at about 9% of GDP in 2015.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are:
- Pressure on foreign exchange reserves, brought about by a widening in the current account deficit.
- Deterioration in either the domestic or regional political climate that affects economic policymaking or regional growth and stability.

The main factors that, individually or collectively, could lead to positive rating action are:
- Smaller current account deficits that contribute to lower net external indebtedness.
- A revival of strong and sustainable GDP growth accompanied by ongoing fiscal discipline.
- A trend reduction in the dollarisation ratio.

KEY ASSUMPTIONS
Fitch does not expect a significant worsening of the economic downturn in Russia and major trading partners.

Fitch assumes that the government will maintain its medium-term ambition to keep the fiscal deficit below 3% of GDP, stabilising the general government debt ratio below 40% of GDP.