Fitch Ratings: Georgia’s economy will grow 2.5% in 2016

Global rating agency Fitch Ratings expects the Georgian economy to grow 2.5 percent in 2016, rising to 4.2 percent in 2017 as external conditions improve.

Despite the growing economy, the agency reported 2016 will be another "challenging year” for growth in Georgia, with key trade partners in the former Soviet Union, notably Russia, set to contract again.

While the real effective exchange rate depreciated by almost five percent in 2015, boosting competitiveness, a narrow export base will limit Georgia’s ability to take advantage of this,” said the agency.

However tourism could perform well, with Georgia potentially set to benefit from rising security risk in many competitor destinations. Low oil prices will continue to boost real incomes and credit growth will remain strong,” it said.

Fitch Ratings affirmed Georgia’s long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' with Stable Outlooks. The issue ratings on Georgia's senior unsecured foreign- and local-currency bonds were also affirmed at 'BB-'. The Country Ceiling was affirmed at 'BB' and the Short-term foreign-currency IDR at 'B'.

Fitch Ratings explained the ratings balanced Georgia's large current account deficit, high level of external debt, low external liquidity and subdued per capita income levels with high share of concessional debt, economic resilience, favourable governance indicators and the policy anchor of an International Monetary Fund (IMF) stand-by arrangement (SBA).

The Georgian economy is vulnerable to external shocks and has been affected by the recession in Russia and other important trading partners in the former Soviet Union (FSU),” said the agency.

As of end-2014, 51percent of Georgian exports went to countries in the FSU and remittances from Russia were equivalent to almost five percent of Gross Domestic Product (GDP). In nominal USD terms, merchandise exports fell by around 23 percent in 2015. Remittances decreased 25 percent, with those from Russia falling 39 percent,” said Fitch Ratings.

Despite the negative trends, Georgia’s real GDP growth held up fairly well in 2015, with the economy expanding 2.8 percent in real terms, revealed Fitch Ratings.

In part this is because Georgia has diversified its export markets away from Russia since the war between the two countries in 2008. Twenty-nine percent of Georgian exports go to the European Union (EU), eight percent to Turkey, six percent to China and five percent to the US. Import compression played a role in maintaining positive headline growth, while the plunge in oil prices has lowered inflation, boosting real incomes,” said the ratings agency.

Fitch Ratings summarised the political environment in Georgia and said it was "quiet polarised”.

Tensions could remain high in the run-up to the parliamentary election in October. However Georgia continues to enjoy very strong governance indicators by regional and rated peer standards. The slow normalisation of bilateral relations with Russia is positive for political stability,” said Fitch Ratings.