Newsroom: Article

Emerging Market De(bt)velopments

During 2007 the current account of Georgia further deteriorated reaching a deficit of nearly 20% of Real Gross Domestic Product (GDP), growing from a 6.6% deficit in 2004. GDP was about USD 10 bn in 2007, with 1st quarter 2008 showing a 9% growth. The current account deficit is mainly financed by foreign capital inflows, including foreign direct investment, which surged to USD 1.5 bn in 2007 (compared to USD 1.1 bn in 2006). The banking sector has also contributed, by increased borrowing in foreign capital markets.

The total amount of Georgia’s foreign debt and state-guaranteed loans stands at about USD 2.5 bn, as of June 30 2008. The bilateral portion of this debt is owed to 15 creditors, of which Germany (USD 180 m) and Russia (USD 120 m) are the biggest. Georgia also owes about USD 1.5 bn to international financial institutions and organisations, of which the World Bank is the largest with USD 950 m, followed by the International Monetary Fund (IMF) with USD 240 m.

As we reported earlier, in 2004 the Paris Club creditors have agreed to restructure a part of Georgia’s foreign debt, consisting of USD 160 m in arrears and maturities, which were due until 2006. That restructuring was aimed at supporting the reform plans of the Georgian government and contributing to Georgia’s economic outlook.

However, it seems that the economic reforms and performance has not been sufficient to create a stable economic outlook for Georgia. Its dependency on foreign investments has grown and the inflation rate is increasing after having been stable at around 12% in recent years. Two contributing factors have been the restriction in 2006 by Russia to its markets for some Georgian products and the 70% increase in price of natural gas imported from Russia.

The current military conflict with respect to South Ossetia will likely have a downward pressure on the Georgian economy and limit its lending potential in the international financial markets.

Standard & Poor’s maintained Georgia’s sovereign credit rating at B+ and Fitch rated Georgia at BB- in 2007. There is a reasonable probability that there will be downgrades of these ratings if the current political and economic turmoil continues.

There are no reports as yet of defaults by Georgian sovereign entities, banks or other large Georgian corporates. However, considering the possible impact of the international credit crisis, the high current-account deficit, the growing inflation and the military conflict on regular business, we advise holders of Georgian bank and trade debts to contact us for advice on any questions relating to (potential) defaults or the possibility of trading out of risk positions.

A.R. Thiescheffer on thiescheffer@omnibridgeway.com
H. Rijkens on rijkens@omnibridgeway.com

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