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Georgian Economy - Empowering Private Sector to Drive Growth

22 Feb, 2018

Georgia delivered strong economic performance and achieved significant milestones in 2017. It became the ninth easiest place to do business globally, according to the latest World Bank Doing Business report. The resilience of the economy has been acknowledged by a one-notch sovereign credit rating upgrade from Moody’s. Trust in Georgia’s growth model was demonstrated by record high reinvestment by foreign companies in 2017, when the economy grew by an estimated 4.8%. Increased external demand for goods and services originating in Georgia made net exports the main driver of growth in 2017 for the first time since 2013. Tourism posted a stellar performance, with inflows in the sector totaling US$ 2.8bn. The government boosted capital expenditure while the fiscal deficit reduced to 3.9% in 2017 from 4.1% in 2016. Importantly, reinvestment by foreign companies almost doubled and reached c.US$ 600mn in 9M17, indicating investors’ trust in Georgia’s growth model and the success of the profit tax reform introduced in 2017.

Inflation retreated to 4.3% in January 2018, and we expect it to decrease to close to the 3.0% target in 2018 after temporary price pressures seen in 2017. In line with lower inflation, we expect the National Bank of Georgia (NBG) to cut the policy rate by 50bps from the current 7.25%. We also expect the GEL to strengthen to 2.40 vs the US$, which should also lessen price pressures from imported inflation. We think that the NBG will intervene and build reserves to preserve competitiveness in case the GEL significantly appreciates vs the US$.

The government’s commitment to containing current spending growth and increasing the fiscal space for capital spending has been demonstrated by recently approved remuneration law. Moreover, the government has reduced the processing time and administrative procedures for refunding VAT claims. This together with profit tax reform should strengthen the financial position of corporates, increase investment and support private sector-driven growth.

We maintain our GDP growth forecast at 5.4% for 2018. This forecast is based on 1) better-than-expected growth momentum among Georgia’s main trading partners; 2) commencement of large investment projects (Anaklia, Nenskra); 3) acceleration of the positive impact from growth-enhancing reforms by the government; and 4) overall improvement in consumer and business confidence locally. In addition, we see the expected monetary easing as positive for the growth outlook.

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Regional Fixed Income Market Watch | January 2018

13 Feb, 2018


  • US economy increased by 2.3% y/y in 2017 after a 1.5% y/y growth in 2016.  Notably, US GDP growth in 4Q17 was at an annualized 2.6% y/y (advance estimate) after expanding 3.2% y/y in 3Q17. EU19 real GDP grew by 2.5% y/y in 2017. GDP growth in EU19 came in at 2.7% y/y in 4Q17 after a 2.8% y/y in 3Q17. China’s economy grew by 6.9% y/y in 2017. The growth was smooth through each quarter of 2017.
  • Based on rapid estimates, economic growth in 2017 was 7.7% y/y in Armenia, 5.2% y/y in Kazakhstan, 4.8% y/y in Georgia, 2.4% y/y in Belarus, 1.5% y/y in Russia, and 0.1% y/y in Azerbaijan (not available for Turkey and Ukraine yet).
  • Annual inflation in the US was down to 2.1% in December 2017 from 2.2% in the previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was down to 1.3% in January 2018 from 1.4% in December 2017.
  • In January 2018, annual inflation decreased in Russia (2.2%), Georgia (4.3%), Kazakhstan (6.8%) and Turkey (10.4%) and increased in Armenia (2.7%). December 2017 figures indicate a decrease in annual inflation to 4.6% in Belarus and 7.8% in Azerbaijan and an increase to 13.7% in Ukraine.
  • In January 2018, in response to increased inflation expectations, the Ukrainian central bank raised monetary policy rate further to 16.0%, while the Kazakhstan central bank lowered its key rate to 9.75% as inflation was within 5-7% target range. The policy rate has remained unchanged in other countries.
  • Fitch upgraded credit rating of Belarus to B from B- and the outlook to stable from positive, Moody’s and S&P revised the Russia’s outlook to positive from stable, and Fitch and S&P revised the outlook for Azerbaijan to stable from negative.


Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, and Ukraine.

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Georgian Railway - 9M17 update

6 Feb, 2018

GR released 9M17 unaudited results and Management Discussion and Analysis. Revenue decreased 12.0% y/y to US$ 122.3mn due to lower freight traffic volumes. Operating expenses, which are mostly fixed in GEL, decreased 5.4% y/y to US$ 110.2mn. As a result, adjusted EBITDA declined 21.3% y/y, from an already low base, to US$ 47.6mn. Strengthening of GEL vs. US$ in 9M17 led to a non-cash FX gain of US$ 31.6mn, which propped up net income at US$ 37.8mn. In November 2017, the CEO of GR, Mamuka Bakhtadze, became the Minister of Finance of Georgia. David Peradze, previously Director of Mtkvari HPP, has been appointed as his replacement. In September 2017, S&P Global Ratings affirmed Georgian Railway’s “B+” rating, but revised the outlook from stable to negative.

Freight transportation revenue declined 16.1% y/y to US$ 78.8mn in 9M17 from the low base of US$ 93.9mn in 9M16. Freight handling and logistic service revenue declined 6.5% y/y to US$ 15.4mn and 10.8% y/y to US$ 13.4mn, respectively. Freight car rental revenue also decreased 14.3% y/y to US$ 4.0mn. Passenger traffic and other revenue, which accounted for 8.8% of 9M17 revenue, were the only categories that posted increases.

9M17 operating expenses, which are mostly GEL-denominated, declined 5.4% y/y to US$ 110.2mn. The decrease was attributed to GEL’s 6.7% depreciation against US$ in 9M17 vs 9M16. Electricity, consumables, and maintenance expense, down 14.1% y/y to US$ 12.8mn, was the only category that posted a decrease in GEL terms. This decrease was largely driven by a 58.4% y/y decline in repair and maintenance expense to US$ 0.9mn due to lower utilization of the company’s rolling stock.

The decline in freight transportation revenues was almost equally attributable to decreases in liquid and dry cargo revenues. Oil transportation revenues declined 18.9% y/y to US$ 34.2mn, as crude oil transportation revenue dropped 72.0% y/y to US$ 2.6mn. The main driver was a 93.0% y/y decrease in the transportation of crude oil from Turkmenistan, which was redirected to the pipeline. Oil products transportation volume increased 11.7% y/y in 9M17. However, the decrease in tariffs on some oil products in 2016, coupled with a change in the direction mix, resulted in a 4.3% y/y decline in revenue to US$ 31.7mn. Dry cargo transportation revenue (56.6% of total revenue in 9M17) decreased 13.7% y/y to US$ 44.6mn. The major contributors to the decrease were ferrous metals, grain, and sugar. Ferrous metals and scrap revenue more than halved in 9M17 to US$ 3.3mn due to lower volumes to Azerbaijan. Revenues from grain dropped 46.1% y/y to US$ 2.4mn, as some of the volume was shipped by land instead. Sugar transportation revenue decreased 19.3% y/y to US$ 5.9mn due to problems at a sugar factory in Azerbaijan where Brazilian sugar was being re-exported to from Georgia. Chemicals and fertilizers category posted the largest positive contribution in revenue, increasing 26.9% y/y to US$ 3.5mn.

9M17 adjusted EBITDA declined 21.3% y/y to US$ 47.6mn. As a result, the adjusted EBITDA margin contracted from 43.5% in 9M16 to 38.9%. Strengthening of GEL against US$ between end-2016 and 9M17 led to a non-cash FX gain of US$ 31.6mn, accounted for as finance income, which propped up net income at US$ 37.8mn.

In 9M17 operating cash decreased 7.7% y/y to US$ 52.6mn. Investing and financing cash flows remained relatively stable. The decrease in adjusted EBITDA contributed the most to the deterioration of the adjusted EBITDA coverage ratio from 2.0x in 9M16 to 1.6x in 9M17.

In November 2017, the CEO of GR, Mamuka Bakhtadze, became the Minister of Finance of Georgia. David Peradze, previously Director of the Georgian Co-Investment Fund-owned Mtkvari HPP, has been appointed as his replacement. In prior years, David Peradze served in various roles at the Georgian Industrial Group and on several Booz Allen Hamilton/USAID projects at Georgian Railway.

In September 2017, S&P Global Ratings revised its outlook on Georgian Railway from stable to negative and affirmed the rating at “B+”.

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Georgia's Energy Sector - Electricity Market Watch | December 2017

1 Feb, 2018

Electricity power purchase agreements (PPAs) have been eliminated. The government made changes to Decree 214, regulating the expression of interest process for HPP projects on the Ministry of Energy’s list. Currently, the list of potential power plants includes 98 small and medium HPPs with total approximate installed capacity of 1.5 GW. According to the change, listed HPPs will no longer receive guaranteed PPAs from ESCO. In addition, the minimum pre-construction bank guarantee will increase from US$ 5,000 to US$ 15,000. The winner selection criterion (if several candidates bid for the same project) will be the amount of the bank guarantee the investor submits. Previously, the project was awarded to the bidder with the lowest PPA tariff in their proposal. The change will not affect MoUs that have already been signed. The Ministry of Economy did note that strategically important HPPs, such as those with seasonal regulations, might still receive guaranteed tariffs, as an exception, subject to detailed fiscal risk evaluation by the Ministry of Finance. 

Telasi and Energo-Pro are going to invest GEL 85.6mn and GEL 343.5mn, respectively, in grid rehabilitation over 2018-2022. That plan includes the addition of new subscribers, rehabilitation of amortized transmission lines, construction of new substations, increase in transmission capacities, etc. Users currently connected to the 35-110kV transmission grid will be obligated to register as direct consumers in May 2018. Subsequently, they will no longer be subscribers of Telasi or Energo-Pro and will purchase electricity directly from suppliers at prices negotiated with the suppliers on a monthly basis. Direct consumers will pay all service fees to the respective service providers (2.393 tetri/kWh) and the guaranteed capacity fee to ESCO. This change will roughly double direct consumption.

Electricity consumption is expected to increase by 7.1% in 2018. According to the electricity (capacity) forecast of 2018, approved by the Ministry of Economy, the growth in consumption will be met by higher import (+30.8% y/y) and hydro generation (+7.3% y/y). Import sources will be determined during the year according to available commercial contracts. Thermal generation is expected to decrease 4.5% y/y in 2018. According to the forecast, only three small HPPs, with expected generation of 8.9GWh, will be added to the supply side in 2018. HPPs that were commissioned in 2017 will be the main source of the increase in hydro generation. Export of electricity is also expected to increase (+17.5% y/y). Export companies and directions will be determined through the auctions held by GSE during the year. 

Domestic consumption increased 7.7% y/y in 2017 and reached 11.9TWh. Consumption by distribution companies increased 7.1% y/y and accounted for 71.1% of domestic consumption. Telasi subscriber usage (+5.2% y/y) accounted for a third of distributor demand, while Energo-Pro Georgia and former Kakheti Energy Distribution consumption (+8.1% y/y) accounted for the rest. Electricity usage of eligible consumers increased 18.1% y/y, despite the fact that two companies (Rustavi Steel Corporation and Georgian Railway) gave up this status in 2017. Consumption of the Abkhazian region increased 3.9% y/y and accounted for 16.9% of domestic consumption. Exports increased 22.7% y/y and reached 0.7 TWh in 2017. Electricity transit through Georgia declined considerably (-70.1%y/y) to 254.0GWh, of which 80.7% went from Azerbaijan to Turkey, 16.6% from Russia to Armenia, and the rest - from Russia to Turkey.

Growth in demand was met by electricity imports from Azerbaijan (61.3%), Russia (30.2%), and Armenia (8.5%). Electricity import in 2017 increased 3.1 times y/y from the low base in 2016 (-31.5% y/y) to 1.5 TWh, or 11.5% of total electricity supplied to the grid.  The reasons behind the dramatic increase were consumption growth in 2017 and lower hydro generation in the winter (-7.5% y/y), mainly due to Enguri’s maintenance works. Electricity import was chosen over additional generation by certain TPPs due to the flexibility of import, technical constraints, the insignificant difference in prices, and the necessity to have some thermal capacity reserved for system security. Total supply of electricity, comprised of domestic generation (11.5TWh) and import (1.5TWh), reached 13.0TWh (+8.1% y/y) in 2017. 91.0% of total supply was consumed by domestic consumers, 5.3% was exported, and 3.7% was used by power plants or lost during transmission.

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