Fitch Ratings: Georgia-EU deal boasts long-term positive outcomes

Georgia’s signing of an important trade deal with the European Union (EU) will have positive long-term development benefits for Georgia’s sovereign credit profile but it will not be a game changer, said global ratings agency Fitch Ratings on Monday – three days after the country signed the Association Agreement (AA) with the EU. 

Fitch Ratings analysts believed the AA deal, which included the Deep and Comprehensive Free Trade Area (DCFTA) with the EU, would not have an immediate impact on Fitch ratings assessment, which remained focused on the nearer-term prospects for external finances and economic growth. Despite this, the deal would have many positive benefits.

"The DCFTA agreement covering trade in goods including energy and services will open up EU markets for Georgia's exporters, potentially boosting growth,” the Fitch Ratings’ statement read.

Fitch Ratings expected Georgia’s economy to grow by 5 percent (on average) in 2014 and 5.5 percent in 2015. In May the company affirmed Georgia's sovereign rating of 'BB-', three short of investment grade. It planned its next scheduled review on Georgia in October.

Georgia’s real GDP grew 6.3 percent year-on-year in May after 2.7 percent growth in April, according to preliminary data released by Geostat on Monday.

The Government has forecast 5 percent economic growth in 2014.

Fitch Ratings believed Georgia’s improved relations with Russia contributed to a boost in exports in the second half of 2013, which combined with the slowdown in import-intensive investment, helped Georgia's current account deficit to sharply reduce.

"But we think structural weaknesses of the export base and the need to import essential goods will keep the current account deficit well above the 'BB' category median, although it should shrink gradually from 2014,” Fitch Ratings said.

The analyst company said the main driver of foreign direct investment (FDI) in the near future was likely to be the recent launch of the Georgia Co-Investment Fund, in which billionaire and former Prime Minister Bidzina Ivanishvili was the main shareholder. "This could see FDI grow substantially,” Fitch Ratings’ statement read.

In reference to the AA, the company believed this deal would be positive in providing a policy anchor for structural reform.

"Georgia has already adopted a new competition law and the authorities are planning a 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 Ratings said.

In 2012, an EU-commissioned study said, if implemented and sustained, the DCFTA could increase exports to the EU by 12 percent and imports by 7.5 percent. In the long run, it could boost national income by €292million (705 million GEL).