Fitch Ratings: Russia Flight Ban to Weigh on Georgian Growth, Current Account

Russia's ban on flights to and from Georgia is likely to weigh on Georgian economic growth and could hamper the reduction of the sovereign's external vulnerabilities, Fitch Ratings says.

Russia will suspend flights to and from Georgia from 8 July. The move came after an address to Georgian MPs by a Russian lawmaker inflamed long-standing bilateral tensions, leading to large demonstrations in Tbilisi and criticism from Georgian politicians, who accused Russia of interfering in Georgia's internal affairs.
The flight suspension will chiefly affect Georgia's economic growth and external finances through its impact on tourism. Tourism has grown in recent years, contributing about 7.5% of GDP and 70% of service exports in 2018. It has contributed significantly to the narrowing of the country's structurally large current account deficit. A reduction in tourism earnings from Russia (which more than tripled to 4.9% of GDP between 2014 and 2018) could therefore hinder this improvement.
Russian tourists accounted for 20.9% of total tourist arrivals last year. Russian visitors mostly arrive by road, and a decline in Russian arrivals could be partly offset by an increase in visitors from other countries (about one third of tourist arrivals last year were from Azerbaijan and Armenia). Russia is not a major source of FDI, accounting for 5% of total FDI last year. Nevertheless, lower tourism inflows coupled with possible lower FDI present a risk to our GDP growth forecasts, currently 4.6% this year and 4.7% in 2020.
A weakening of the current account and net FDI inflows would increase Georgia's already large external borrowing needs and could put pressure on the Georgian currency, the lari (around 75% of government debt is denominated in foreign currency). We forecast Georgia's gross external debt at 109.6% of GDP in 2019 and gross external financing needs at 90.4% of gross international reserves. The ultimate impact of the flight ban will depend on its duration.
A gradual easing of external imbalances was one driver of our upgrade of Georgia's sovereign rating to 'BB'/Stable in February. But external finances remain a key rating weakness. Georgia has higher net external debt and structurally larger current account deficits relative to its rating category peers, and a large negative net international investment position. To reflect this, the sovereign rating incorporates a qualitative, one-notch downward adjustment to that implied by our Sovereign Rating Model.

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