Fitch: Russian Ban to Reverse Rapid Improvement in Georgian Tourism Revenues

Fitch Ratings Inc., one of the "Big Three credit rating agencies," affirmed Georgia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Stable Outlook, however, it noted that the Russian ban on direct flights with Georgia will partly reverse the recent rapid improvement in tourism revenues.

The report reads that Russia suspended flights to and from Georgia from 8 July, invoking security issues after an address by a Russian MP in the Georgian parliament reignited long-standing bilateral tensions, leading to large demonstrations in Tbilisi.

Fitch noted that Russia is the largest source of tourist arrivals in Georgia, although the bulk of these travel by road. The agency says that Georgian authorities are assessing the impact from the ban and their policy response.

“The flight ban will partly reverse the recent rapid improvement in tourism revenues, with international visitors' growth slowing to 4.3% y-o-y in July, from 19.9% in June, but Fitch expects continued growth over the forecast period,” the report reads.

Fitch assumes the IMF will allow some adjustment of the EFF to accommodate the tourism shock.

The report also reads that dynamic tourism exports and lower import growth following the completion of large energy projects led to a narrowing of the current account deficit to 7.7% of GDP in 2018, from 8.8% in 2017.

“Fitch forecasts the current account deficit will narrow further to an average of 5.3% over 2019-2021 versus 3% for the current 'BB' median, as a slowdown in consumer lending and rising domestic savings following the launching of the funded pension pillar ease pressure on imports,” it says.

In addition to tourism challenges, the agency says Georgia's ratings are supported by governance and business environment indicators that are above the current medians of 'BB' category peers, and a track record of macroeconomic resilience against regional shocks.

However, Fitch believes Georgia's external finances are “significantly weaker” than the majority of 'BB' category peers.

The report also reads that net inflows of foreign direct investment (FDI) are forecast to cover the current account deficit each year. Net FDI is projected to average 5.9% of GDP over 2019-2021, after declining to 5.5% in 2018 from 10.8% in 2017 due to the completion of major infrastructure and energy projects.

Fitch forecasts economic growth to decelerate to 4.3% in 2019, from 4.7% in 2018, as credit growth slows down and the Russian flight ban hinders expansion of the tourism sector. Nonetheless, it will remain above the forecast current 'BB' median of 3.3%. Acceleration of infrastructure spending and a slightly looser fiscal policy will support a pick-up in growth to an average 4.7% in 2020-2021.

The report also notes governance and business environment indicators are well above the current medians of 'BB' category peers, with Georgia ranking 6th out of 190 in the 2019 World Bank Ease of Doing Business Indicator.

Natia Turnava, Georgia’s Minister of Economy and Sustainable Development, says the government is doing its best to neutralize the main challenges for Georgia named by Fitch – the travel embargo imposed by Russia and reduced number of tourists.

"Due to these factors, Fitch has reduced Georgia's economic growth forecast by 0.3% points, but the Georgian government will do its utmost to complete 2019 at a high rate," Turnava said.

Meanwhile, the opposition parties claim the government is unable to develop the country’s economy.

Roman Gotsiridze, the United National Movement MP says it is ridiculous that the government blames only the reduced number of tourists for the current situation in Georgia.

“The fact that Fitch reduced the economic growth forecast for Georgia means that the government has no ability to move the country forward,” he said.

However, Business Ombudsman Irakli lekvinadze says although Fitch's economic growth forecast for Georgia was reduced by 0.3% in 2019, it still exceeds the 3.3% median of the BB category, and in light of the challenges facing the country's economy today, this can only be positively assessed.

By Thea Morrison

Image source: BBC