Moody's changes outlook on Georgia's Ba3 government bond rating to stable from positive; affirms Ba3 rating

Moody's Investors Service ("Moody's") has today changed the outlook to stable from positive on Georgia's government bond ratings, while affirming the Ba3 issuer and senior unsecured ratings.

The key drivers of the outlook change to stable are:

1. Lower growth levels and higher current account deficits due to slower regional growth.

2. An increase in the cost of servicing external and government debt due to the roughly 28% depreciation in the local currency since September 2014.

The affirmation of the Ba3 rating reflects Georgia's high institutional strength and its future growth prospects related to its trade agreements with the European Union (EU) and other countries, and Moody's expectation that foreign direct investment (FDI) levels will remain high.

The following country ceilings for Georgia are unchanged: a Baa3/NP local-currency country risk ceiling, a Baa3/NP local-currency deposit ceiling, a Ba1/NP foreign-currency bond ceiling, and a B1/NP foreign-currency deposit ceiling.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE TO STABLE FROM POSITIVE

FIRST DRIVER: LOWER GROWTH LEVELS AND HIGHER CURRENT ACCOUNT DEFICITS DUE TO SLOWER REGIONAL GROWTH

Economic trends in Georgia have deteriorated since mid-2014. Moody's estimates that real GDP growth fell in 2015 to 2.8%, below 4.6% recorded in 2014 and the 5.4% average for 2011 to 2014. This was mainly due to the slowdown in the Commonwealth of Independent States (CIS) region. For 2015, money transfers to Georgia (mostly remittances) were down 25% and merchandise exports were down 23%. Moreover, we forecast that real GDP growth will remain subdued in 2016, at 3.0%. Georgia's current account deficit as a percentage of GDP has also deteriorated since mid-2014, to 10.5% for all of 2014, from 5.7% in 2013, which increases Georgia's reliance on foreign capital to finance this deficit. Moody's estimates that Georgia's current account deficit will remain elevated, at 11.6% in 2015 and 11.8% in 2016.

SECOND DRIVER: AN INCREASE IN EXTERNAL DEBT AND A WEAKENING OF FISCAL METRICS DUE TO THE ROUGHLY 28% DEPRECIATION IN THE LARI SINCE SEPTEMBER 2014

As a consequence of the roughly 28% depreciation in the Georgian lari since September 2014, Georgia's external debt as a percentage of GDP has increased from 81% in September 2014 to 97% in September 2015. Some of this debt is in the form of multilateral loans, which are mostly on concessional terms and of longer tenors, posing less immediate refinancing risks. Nonetheless, this increase in Georgia's external debt raises Georgia's external vulnerability risks from a sudden shock. The depreciation of the lari also makes amortization and interest payments more expensive in lari terms, which also subdues growth prospects further.

In addition to the increase in external debt, the debt-to-GDP ratio of government debt has also risen, given that 75% of government debt was in foreign currency at end-2014. As a consequence, Moody's estimates that Georgia's debt-to-GDP ratio will rise to 41.4% in 2015 from 32.5% in 2012, an increase of roughly 9 percentage points, weakening Georgia's fiscal strength.

RATIONALE FOR AFFIRMATION OF Ba3 RATING

The affirmation of the Ba3 rating reflects Georgia's high institutional strength and its future growth prospects. The Association Agreement (AA) and Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU are major catalysts for reforms and provide institutional support for Georgia. We anticipate that Georgia's institutional framework will continue to improve over the medium term as Georgia further aligns its institutional standards with EU norms. This will also increase Georgia's economic strength and resilience to external vulnerabilities, as Georgia exports become more competitive and exports to the EU increase.

Georgia's policies to diversify its access to markets is another strength, with the conclusion of a new free trade agreement (FTA) with the European Free Trade Association in February and the likely conclusion of an FTA with China in 2016. As such, foreign business can take advantage of Georgia's trade agreements with other countries to export products made in Georgia duty free. FDI has thus increased in recent years, with investment increasing by US$817 (87%) in 2014 over the prior year and two large projects worth over US$7.5 billion (or 54% of GDP) announced in early 2016.

WHAT COULD MOVE THE RATING UP / DOWN

Upward pressure on Georgia's rating could develop if external vulnerabilities posed by high current account deficits and external debt were to decline, particularly as the expected benefits of the AA / DCFTA start to materialize. Further progress on institutional reforms that lead to an improvement in medium term growth prospects, as well as improvements in government debt metrics, would also be credit positive.

Downward pressure on the rating could develop from an increase in external vulnerability risks or geopolitical risks, as well as if growth levels were to decline to very low or negative levels. A deterioration in fiscal metrics could also put downward pressure on the rating.

GDP per capita (PPP basis, US$): 9,209 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.6% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.0% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -2.0% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.5% (2014 Actual) (also known as External Balance)

External debt/GDP: 83.0% (2014 Actual)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 09 March 2016, a rating committee was called to discuss the rating of the Georgia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The systemic risk in which the issuer operates has materially increased.