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Regional Fixed Income Market Watch | May 2018

15 June, 2018


  • Real GDP growth in the US was revised down to an annualized 2.2% y/y (2nd estimate) in 1Q18 from an annualized 2.3% y/y (advance estimate). Turkish economy grew by 7.4% y/y in 1Q18.
  • Based on rapid estimates, in April 2018 economic growth came in at 7.3% y/y in Armenia, 6.5% y/y in Georgia, 4.4% y/y in Kazakhstan and 1.7% y/y in Russia. In 4M18, GDP was up 4.8% y/y in Belarus and 1.2% y/y in Azerbaijan.
  • In May 2018, annual inflation in the US was 2.8% up from 2.5% in previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 1.9% in May 2018 up from 1.2% in April 2018.
  • In May 2018, annual inflation was below to the target level in Georgia (2.5%), Russia (2.4%), Armenia (1.6%) and Belarus (4.4%); inflation was below expectation in Azerbaijan (2.0%); Inflation was within the target in Kazakhstan (6.2%), and above the target in Turkey (12.2%) and Ukraine (11.7%).
  • The Federal Reserve (central bank of the US) raised the target range for the federal funds rate for the 2nd time this year by 25 basis points to 1.75%-2.0%, in June 2018.
  • Monetary policy rate was raised to 17.75% (from 8.0%) in Turkey and cut to 9.0% (from 9.25%) in Kazakhstan as of 14 June 2018. The policy rate has remained unchanged in other countries as of mentioned date.


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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Georgia's Energy Sector - Electricity Market Watch | April 2018

31 May, 2018

Electricity consumption expected to increase by 6.9% y/y in 2018. The updated annual forecast of 2018 electricity balance was issued on May 16, 2018. Main modifications are related to export and import amounts, hydro generation and 4M figures (forecasted replaced by actuals). According to the modified annual forecast for 2018: Electricity consumption expected to reach 12.7TWh (growth revised down to 6.9% y/y from 7.1%y/y in previous edition); Import expected to reach 1.3TWh, which is 12.4% y/y reduction compared to initial forecast of 30.8% y/y increase; Export planned at 0.5TWh. GSE should define the exporter companies and export directions by the public auctions. So far, the most popular direction within exporters remains Turkey and Armenia is second most popular market.

Electricity consumption increased by 6.7% y/y to 4.3TWh in 4M18. The increase was mainly driven by the 8.4%y/y growth in consumption of distribution licensees due to addition of new commercial subscribers (Energo-pro’s consumption was up by 9.7% y/y and Telasi’s was up by 6.1% y/y). Consumption by Eligible consumers and Abkhazian region was down respectively by 8.5% y/y and 5.0% y/y in 4M18. 

Domestic generation was up by 20.6% y/y in 4M18, mainly driven by 39.8%y/y increase in hydro generation. This dramatic increase in hydro generation can be explained by last year’s low base and by the good hydrological conditions.  Surplus in hydro Generation (19.5% over the planned level) in 4M18 reduced thermal generation (-16.8%y/y) and imports (-38.9%y/y), both being significantly below the planned levels (17.8% and 40.6% respectively). 

Electricity imports stood at 0.5TWh (US$ 27.9mn) in 4M18. The 88.6% of total imports came from Azerbaijan, while the rest came from Turkey (6.7%) and Russia (3.3%). Unexpected surplus in hydro generation also resulted in unexpectedly early exports of electricity. Export of electricity started in second half of April and reached 61.7GWh (US$ 1.8mn) in 4M18.

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Georgian Economy - Exposure to Turkey Lower than Broadly Believed

28 May, 2018

Currency depreciation in Turkey is raising concerns in Georgia, as many analysts believe that there is a direct link between TRY and GEL. While correlation to the currency of its largest trading partner exists, we argue that it is relatively low and significantly smaller than widely believed.

In recent years, TRY has seen far more rapid depreciation trends than GEL. GEL is however impacted in the short term by TRY through the expectations channel. For example, GEL’s depreciation from September to November 2017 was largely driven by negative expectations amid TRY depreciation – there was no evidence from the trade, tourism or financial channels to explain the development.

Georgia’s exposure (as defined by combination of four channels: exports, tourism, remittances and FDI) to Turkey accounted for only 6.1% of GDP in 2017. Notably, in the 2008-2017 period, exposure to Turkey increased by just 1.9ppts as a share of GDP, while exposure to other countries rose by 20.3ppts. 

Georgia is a well-diversified economy and this minimizes the potential negative impact from turbulence in any particular market. This was illustrated in 2015-2016 when growth in Georgia slowed but remained positive at 2.8% as many of its trading partners entered recessions. Furthermore, Georgia benefits from a stable macroeconomic environment, prudent monetary and fiscal policies, a business-friendly environment, and a healthy banking sector. This is reflected in increasing investment from local and international investors.

Summing up:

  • Given Turkey’s economic structure, dependency on short-term portfolio funds flow, and domestic political developments, TRY has been more vulnerable to USD global strengthening than GEL.
  • Inflation differential between Turkey (double-digits) and Georgia (low single-digits) justifies 6-8% annual outperformance of GEL against TRY in nominal terms.
  • As Georgia enters the busy tourism season, GEL is expected to be stable over the June-September period.
  • The ongoing currency crisis in Turkey may cause GEL to depreciate by 2-3% in the short term via the trade channel (to 2.49-2.52 vs US$).
  • Pressure from TRY weakness will be offset by positive spillovers from Russia and Azerbaijan’s recovery. 
  • We expect the current account deficit to improve slightly to 8.6% of GDP in 2018 (8.7% in 2017) and believe that the fundamental factors affecting GEL remain favorable. We see GEL’s fair value close to 2.4 vs US$.
  • We expect year-end GEL weakness, but we think that volatility will be lower compared to previous years.

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Georgian Economy - Growth Gaining Momentum

25 May, 2018

The Georgian economy delivered strong 5.2% y/y growth in 1Q18, fueled by firmed external demand. Goods exports, tourism revenues and remittances continued their strong double-digit growth rates. Government capital spending, which more than doubled y/y, and increased reinvestments by businesses were other growth drivers. Improved consumer sentiment supported bank loans to increase 21.6% y/y excluding FX effects.

Inflation decelerated sharply to 2.5% in April 2018 once excise tax effects faded. The NBG has kept its policy rate at 7.25% since the start of the year as it believes that the factors affecting inflationary risks have not yet sufficiently weakened. The NBG considers the policy rate cut in 2H18 and expects annual inflation to remain close to the 3.0% target level in 2018. It purchased US$ 20mn in April, limiting the GEL’s appreciation vs the USD. Macroeconomic factors affecting GEL remain favorable and considering Georgia entering active tourism season we expect the GEL to be close to 2.4 vs the USD in the medium term, despite current volatility in major trading partners’ currencies. We think that the NBG will continue purchasing FX in case the GEL appreciates significantly against its major trading partners’ currencies.

Based on 1Q18 fiscal data, the government remains committed to containing current spending growth and capital spending acceleration. We believe that the fiscal deficit will reach 2.8% of GDP in 2018 as agreed with IMF.

We maintain our forecasts and expect GDP growth of 5.4% for 2018. Our projection is strengthened by favorable external conditions, ongoing government reforms and improved consumer and business confidence locally. However, risks to growth may still come from the external sector.

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