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Georgia's Tourism Sector - Tourism Market Watch | July 2017

9 Aug, 2017

The number of direct flight routes and flight frequency is on the rise, in line with the record growth in the number of international visitors to Georgia. The number of direct flight routes peaked in June 2017, as 38 carriers serviced 87 routes with almost 400 weekly flights. The growth in connectivity goes hand in hand with the increasing number of visitors from secondary source countries.

The Georgian government is trying to incentivize domestic air travel. According to the latest amendments to the tax code, domestic flights are exempt from excise and VAT taxes on aviation fuel and flight service, which should increase their affordability. Furthermore, the government has provided a GEL 10.8mn subsidy to ServiceAir, a company operating domestic flights to Batumi, Mestia, and Ambrolauri. ServiceAir is expected to operate domestic flights year-round.

International travel inflows to Georgia increased 27.9% y/y to US$ 659.0mn in 2Q17, after growing 23.3% y/y in 1Q17. Overall, travel inflows were up 26.0% y/y to almost US$ 1.1bn in 1H17. The share of travel inflows in service exports reached 61.1% in 1Q17, up from 56.4% in 1Q16. Value added from tourism was roughly flat y/y at GEL 480.1mn in 1Q17 and accounted for 6.8% of GDP, compared to 7.4% in 1Q16.

The number of international arrivals was up 28.5% y/y to 0.98mn in July 2017. Out of the top four source markets, there was very strong growth from Armenia (+25.4% y/y), Azerbaijan (+13.8% y/y), and Russia (+60.4% y/y). For the first time in 2017, the number of visitors from Turkey was up, albeit slightly (+0.6% y/y). Arrivals from the EU were up 21.4% y/y to over 45,000 visitors.

The tourist category continues to drive arrival growth in July 2017. The number of overnight visitors (‘tourist’ category) was up 32.9% y/y – after the largest y/y growth on record in July 2017 – and accounted for 52.9% of international arrivals. Same-day arrivals were roughly flat, while transit visitors posted an outsized 53.7% y/y growth rate. 

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Regional Fixed Income Market Watch | July 2017

9 Aug, 2017

  • US GDP growth accelerated from an annualized 1.2% y/y (revised) in 1Q17 to 2.6% y/y (‘advance’ estimate) in 2Q17. GDP growth in EU19 was also higher at 2.1% y/y in 2Q17 vs 1.9% y/y in 1Q17. The Chinese economy grew 6.9% y/y in 2Q17. 
  • According to rapid estimates, in June 2017 economic growth came in at 5.8% y/y in Kazakhstan, 5.1% y/y in Armenia, 4.8% y/y in Russia, and 4.6% y/y in Georgia. In 1H17, GDP was up 1.0% y/y in Belarus and down 1.3% y/y in Azerbaijan. Ukraine’s GDP was up 2.5% y/y in 1Q17.
  • Annual inflation in the USA retreated to 1.6% in June 2017 from 1.9% in the previous month. According to the Eurostat flash estimate, EU19 annual inflation was stable at 1.3% in July 2017.
  • In July 2017, annual inflation retreated in Georgia (6.0%), Turkey (9.8%), Russia (3.9%), Kazakhstan (7.1%), and Armenia (0.9%). June 2017 figures indicate an increase in annual inflation to 15.6% and 6.5% in Ukraine and Belarus, respectively, and a decrease in Azerbaijan to 14.4%.
  • Central Bank policy rate was lowered in Belarus (from 13.0% to 12.0%) in July 2017 and has remained unchanged in other countries.
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 Economy - Clear Skies and Tailwinds

8 Aug, 2017

Executive Summary‚Äč

The Georgian economy gained traction quickly in 1H17,
growing by 4.5% as external demand stabilized and the government initiatives strengthened consumer demand and business confidence. This is a meaningful acceleration, following subdued growth in 2015-16 due to weaker external environment.

In 1H17, combination of goods export growth, robust tourist arrivals, recovery in remittances and modest increase in imports improved the current account deficit and stabilized the currency.

Price pressures have re-emerged in 2017 due to one-off factors related to excise tax hikes, and annual inflation came in at 7.1% in June. The NBG reacted by moderately tightening monetary policy, raising the policy rate to 7.0% from 6.5% at end-2016. However, the price pressures are likely to be transitory, and we expect no further rate hike this year. We also expect inflation to decline rapidly in 2018 toward the 3.0% target once the effects of the excise tax increases fade.

Better-than-expected growth strengthened the government’s fiscal position in 1H17. With growth expected to remain above the budgeted level, the government is in a position to deliver its planned fiscal stimulus without jeopardizing the fiscal accounts and maintain fiscal discipline as agreed with the IMF. 

The GEL strengthened in 1H17, reflecting favorable external conditions and the related uptick in growth. The National Bank intervened with close to US$ 90mn purchase in 1H17 to curb the GEL’s appreciation pressure. Our calculations suggest that the currency’s fair value against the US$ is close to 2.35 and that it is currently slightly undervalued. We do not expect any dramatic movements this year and see the GEL at 2.3 versus the US$ in the medium term.

Contrary to expectations, the Georgian economy hasn’t suffered from recent economic uncertainties in Turkey. The trade balance with Turkey improved by 13.0% y/y in 1H17 despite the GEL’s real appreciation against the TRY. Investments from Turkey rose by 42.1% y/y in 1Q17 and we expect solid US$ 300mn FDI from Turkey this year.  Remittances also continue to grow. While tourist arrivals from Turkey fell by 15.9% y/y in 1H17, this was more than offset by the strong growth in arrivals from other countries.

We revise our 2017 GDP growth forecast up to 4.7% from 4.3%, as we expect the government’s budgetary focus on infrastructure spending and corporate tax reform to boost investments.

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

4 Aug, 2017

The degree of deregulation in the electricity market is set to increase in 2018. According to the changes to the Law on Electricity and Natural Gas, the minimum threshold for deregulation will increase from 13MW to 40MW as of January 1, 2018. Based on our estimates, this change will result in an increase in the share of deregulated power plants from 15.5% to 20.5% of total installed capacity and about 3.1TWh will be supplied to the Georgian market at unregulated prices annually over 2018-2019.

Direct consumers are set to account for at least a quarter of total electricity consumption in Georgia. According to the changes to the Law on Electricity and Natural Gas, starting May 1, 2018, consumers connected to high voltage (35kv and above) transmission lines will automatically be registered as direct consumers. This change will result in an increase in the number of direct consumers from two to over 60, with aggregate annual consumption of at least 3.1TWh.

GNERC has recalculated natural gas end-user tariffs for the three leading gas distribution companies, which together accounted for 89.8% of the market in 2016. Old tariffs varied by region and supply pressure, while the new methodology sets a uniform, transparent tariff structure. The end-user tariff is comprised of three components: transmission, cost of gas, and distribution. The transmission tariff is now set at 1.884 tetri/m3 for all consumers, an average increase of 0.5 tetri/m3. Cost of gas is set at 26.8 tetri/m3 (a decrease of 12.5%) The distribution tariff, designed to cover the distribution licensee’s investment costs, is the only remaining driver of tariff differences among distribution companies.

Kakheti Energy Distribution was sold for GEL 21.7mn at a public auction. The buyer was Energo-Pro Georgia, whose market share will increase from 60.2% to 64.6% as a result of this transaction. Energo-Pro Georgia will become the sole electricity distributor in Georgia outside of Tbilisi. Kakheti Energy Distribution has operated in bankruptcy since 2011, managed by a representative of the National Bureau of Enforcement. 

Electricity exports increased 8.6% y/y in June 2017 to 230.1 GWh and 7.4% y/y in 1H17. 28.3% of exported electricity went to Turkey, down 38.8% y/y. The top exporters to Turkey were Georgian Urban Energy (58.0% of total) and Adjar Energy 2007 (26.2% of total). Exports to Armenia decreased 2.3% y/y and accounted for 18.4% of total exports. Exports to Russia almost doubled (+98.2% y/y) and accounted for over half of electricity exports (53.3%), with ESCO being the sole exporter. The reason behind the increase in exports to Russia was an unexpected surplus of generation in the second half of the month and inflexibility of other markets to import additional electricity on short notice. Overall, ESCO accounted for 63.4% of total electricity exports in June 2017.

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