Georgia ratings lowered to ‘B’ pending military outcome

Standard & Poor's Ratings Services said it had lowered its long-term sovereign credit ratings on the Government of Georgia to 'B' from 'B+' and placed the ratings on CreditWatch with negative implications, as the sovereign moves rapidly toward all-out war with Russia (foreign currency BBB+/Positive/A-2). The 'B' short-term ratings were also placed on CreditWatch with negative implications. The transfer and convertibility assessment was lowered to 'BB-' from 'BB'.
"The violence between Georgian troops and armed separatists in the breakaway region of South Ossetia over the past seven days has escalated to the brink of war with Russia–upon whom the separatists depend for political and economic support," Standard & Poor's credit analyst Trevor Cullinan said.
After the breakdown in a 24-hour ceasefire on Aug. 8, 2008, full-scale military action by the Georgian government and escalating hostilities in the separatist zone have been followed by a significant build-up of Russian military hardware in the area. The rhetoric and actions of the two governments indicate that they are both on a war footing, which will jeopardize the large foreign direct investment inflows that finance Georgia's large current account deficit, and which have been a key factor in Georgia's strong economic growth performance over recent years. Higher-than-anticipated defense spending will also put the Georgian government's goal of fiscal consolidation at significant risk.
Official Georgian statements suggest that the military action will continue until South Ossetia is fully under Tbilisi's control, while the Russian president has promised to defend Russian citizens in South Ossetia. However, it is possible that the difference in military capabilities between the two sovereigns or the geopolitical dynamics of the region, which are likely to result in intense diplomatic efforts by the international community, will prevent extended hostilities. Nevertheless, the outcome for domestic and foreign policy of even a short-lived conflict remains uncertain.
"Standard & Poor's expects to resolve the CreditWatch Negative placement when hostilities subside and the political repercussions start to take shape," Mr. Cullinan said. "If the armed hostilities with Russia were to be sustained and economic and political stability were to come under acute threat, the sovereign rating would be lowered. A swift stabilization of the situation would likely contribute to containing the financial and political fallout. In this turn of events the CreditWatch placement would be removed."