Summary 

After the financial crisis of 2008, the level of corporate debt in the world continues to grow and reaches historic maximum in a number of countries, posing a potential threat to the sustainability of the business. Nearly half of the increased debt comes from emerging markets, a quarter of which is debt from non-financial corporations. While debt growth in some cases implies increased access to global capital markets, history has shown that high levels of debt relative to equity in corporate balance sheets can lead to losses and increase debt service burdens. This, in turn, can lead to creditworthiness, debt default risks, and high corporate default, which can spillover to the financial system (Chow, 2015). Consequently, the more important the sector is to the economy, the more important is its financial sustainability.

The 2008 financial crisis has clearly shown the world the importance of the sustainability and successful functioning of the construction sector for the economy. Excessive risk-taking by construction companies, both in terms of debt burden and in terms of oversupply of housing, contributed to the growth of the US real estate bubble. The bust of the bubble led to the collapse of financial markets, which subsequently grew into a global economic crisis. For the first time, after the 2008 global economic crisis, the world faces the similar scale recession in 2020. The economic crisis caused by Covid-19 has once again highlighted the importance of the solvency analysis of the construction sector and its resilience to various macroeconomic shocks.

Despite the fact that the construction sector is one of the main sectors for the country’s economy (not only in terms of its contribution to the economy, but in terms of high impact on other sectors’ output), the survival rate of construction sector enterprises is not high in Georgia, which indicates the need of risk management improvement by Georgian construction companies. The goal of the study is to assess construction sector’s and construction companies’ financial health, solvency and sustainability to economic shocks by taking into account the country-specific characteristics.

The study assessed the resilience of the construction sector assuming 3 types of economic shocks. Income and interest rate shocks, which are often found in the literature (Chivakul and Lam, 2015; Klein and Murgasova, 2016), while discussing the financial sustainability of companies and the country specific exchange rate shock, which is rare in developed countries. According to the National Bank of Georgia, the largest share of loans to the construction sector, about 80%, is in foreign currency. Consequently, a significant part of construction companies are not hedged, because the value of their assets is determined by the purchasing power of the population, which is expressed in the national currency. As a result, if the exchange rate depreciates, their debt burden increases, leading to the decrease of their solvency.

The sensitivity analysis of the construction sector showed that all the three economic shocks have an impact on the financial sustainability of construction companies, although their sensitivity to various shocks are different. Companies are the least sensitive to income shock, both in the case of moderate and severe scenarios, and most sensitive and hence mostly affected by the exchange rate shock.