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Regional Fixed Income Market Watch | Jul 2018

15 Aug, 2018


  • Real GDP growth in the US was up to an annualized 4.1% y/y (advance estimate) in 2Q18 from an annualized 2.2% y/y recorded in 1Q18. In July 2018, unemployment rate decreased by 0.1ppts to 3.9% from 4.0% in previous month. GDP growth in EU19 was down to 2.1% y/y in 2Q18 from 2.5% y/y in 1Q18. Unemployment rate in EU19 was 8.3% in June 2018 down from 8.4% in May 2018. China’s economy grew by 6.7% y/y in 2Q18, 0.1ppts lower than in 1Q18.
  • Based on rapid estimates, in June 2018 economic growth came in at 9.6% y/y in Armenia, 5.3% y/y in Kazakhstan, 4.0% y/y in Georgia and 1.5% y/y in Russia. In 1H18, real GDP growth was 4.5% y/y in Belarus and 1.3% y/y in Azerbaijan.
  • In July 2018, annual inflation in the US was 2.9% unchanged from previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 2.1% in July 2018 up from 2.0% in June 2018. 
  • In July 2018, annual inflation was below to the target level in Armenia (2.3%), Russia (2.5%), Georgia (2.8%) and Belarus (4.1%); inflation was within the target in Kazakhstan (5.9%), and above the target in Ukraine (8.9%) and Turkey (15.9%).
  • Monetary policy rate was cut to 7.0% (from 7.25%) in Georgia and increased to 17.5% (from 17.0%) in Ukraine in July 2018. The policy rate has remained unchanged in other countries.
  • In July 2018, Fitch downgraded both foreign and local sovereign credit ratings for Turkey to BB from BB+ and to BB+ from BBB-, respectively and the outlook was revised to negative from stable.

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 Oil and Gas Corporation - Solid Performance, Good Prospects

14 Aug, 2018

GOGC released strong audited FY17 results. Revenue remained largely flat, standing at US$ 267.7mn, while the reduction in the average gas purchase price contributed to the decline in operating expenses (-7.9% y/y to US$ 188.9mn). As a result, adjusted EBITDA reached US$ 93.7mn, up 17.7% y/y. Higher adjusted EBITDA and the considerable cash balance drove the net-debt-to-adjusted EBITDA ratio to 0.9x as of end-17 compared to 2.2x a year before. With significant capital expenditures planned for 2018-20, we expect this ratio to temporarily deteriorate in 2018 but remain comfortably below the 3.75x Eurobond covenant. The commissioning of the Gardabani II CCPP from 2019 is expected to generate an additional steady cash flow stream for GOGC and bring this ratio close to 1.0x.

Revenue flat
FY17 revenue remained flat at US$ 267.7mn. Gas and electricity sales – two major revenue streams accounting for 86.3% of the total revenue – remained relatively stable, growing 2.8% y/y and 2.2% y/y, respectively. Revenue from rent of pipelines was down 17.6% y/y to US$ 23.9mn while crude oil sales rose 27.4% y/y, helped by increased oil prices worldwide.

Operating expenses down
The cost of gas, the largest expense category accounting for 82.9% of total operating expenses, was down 4.8% y/y to US$ 157.4mn. Other operating expenses were also down (-18.5% y/y). The strengthening of the GEL against the US$ between end-16 and end-17 led to a non-cash FX gain of US$ 2.7mn in the reporting period compared to a US$ 21.3mn loss last year.  

EBITDA and profitability improved
Reduced operating expenses coupled with stable revenue stream translated into a 17.7% y/y increase in adjusted EBITDA, which came in at US$ 93.7mn. The adjusted EBITDA margin also improved to 35.0% in 2017 from 29.7% a year before. Appreciation of the local currency in 2017 helped the bottom line, which more than doubled to US$ 87.9mn in 2017.

Major capital projects planned over 2018-20
China Tianchen Engineering Corporation was chosen to construct the Gardabani II CCPP with installed capacity of 230MW. The active phase of construction began in spring 2018 and completion is scheduled for winter 2019-20. The construction will be fully funded from GOGC’s internal sources.

Construction of the underground gas storage reservoir is planned for 2019-20. The German Development Bank (KfW) and European Investment Bank (EIB) are among the international organizations being considered for financing the US$ 300mn project.

Compliant with Eurobond covenants
With significant growth of adjusted EBITDA, the net-debt-to-adjusted EBITDA ratio improved considerably from 2.2x in 2016 to 0.9x in 2017. This ratio is expected to remain comfortably below the Eurobond covenant of 3.75x over the medium term.

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Georgia's Energy Sector - Electricity Market watch - June 2018

14 Aug, 2018

Adjar Energy 2007 finished construction of run-of-river Kirnati HPP with installed capacity of 51.3MW, and projected annual generation of 226GWh. The HPP currently operates in test regime and expected to move to full capacity by September 2018. In addition to above mentioned HPP, there are three other small HPPs already commissioned in 2018: 1) Kasleti HPP - 9.0 MW, 2) Kheori HPP - 1.3MW and 3) Shilda 1 HPP - 1.2MW.  Total capacity of these four HPPs is 63MW. As of July 2018, there are 80 operational HPPs in Georgia. Out of these, 57 are small HPPs (capacity below 13.0 MW) and 4.6% (190.1 MW) of combined installed capacity.

Domestic electricity consumption increased 12.6% y/y in June 2018 and 8.4% y/y in 1H18. The eligible consumers and distribution licensees drove this growth. Eligible consumers’ increased their consumption by 34.7% y/y, accounting for 18.0% of total domestic consumption. This growth can be explained by addition of 2 new companies (GFDC Georgia and Geo Servers) to the group of eligible consumers. This was in line with legal changes effective since May 2018 as their average monthly consumption of electricity was above 15MWh. Consumption by distribution licensees was up by 10.2% y/y in June 2018, as consumption of new commercial subscribers fully compensated the reduced consumption caused by reallocation of 2 above mentioned large companies into different category.

Electricity exports were down 15.4% y/y in June 2018, while exports were up 5.8% y/y in 1H18. Electricity exports accounted for 16.0% of electricity supplied to the grid in June 2018. A 78.6% out of 194.6MWh total exports were directed to Turkey (+134.6% y/y), while the rest was exported to Russia, Armenia and Azerbaijan in June 2018. A 76.2% of electricity export to Turkey was conducted by ESCO in exchange of electricity imports planned during October- December 2018.

Electricity generated by domestic sources increased by 6.2% y/y in June 2018 and by 14.8% in 1H18. Hydro generation (+6.4% y/y in June 2018) drove the domestic supply growth supported by good hydrological conditions and commissioning of new HPPs. Enguri/Vardnili generation was up by 16.7% y/y and satisfied lions share (56.5%) of electricity demand in June 2018. In 1H18 generation of Enguri/Vardnili increased by 30.5% y/y and reached 2.3TWh, highest number since 2010. Thermal generation and imports accounted for 0.8% of total electricity supply and were intended only for system’s balancing and stability purposes. 

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Georgian Economy - GEL - Expected Adjustment

13 Aug, 2018

Prudent macroeconomic policy-making and strong growth in external earnings helped the GEL remain immune to the sell-off in regional currencies until early August 2018. However, the TRY’s collapse on 10 August affected the GEL through the expectations channel when the currency lost 3.9% in one day against the USD trading at 2.57 on Bloomberg. Taking into account the ongoing currency crisis in Turkey and sour global sentiment in EM currencies, we expect the US$/GEL rate to weaken to around 2.7 compared to our previous 2.6 projection for end-2018. The gradual adjustment in the US$/GEL rate is likely a necessary correction to rectify the GEL’s real gains against the TRY and RUB – Georgia’s two largest trading partners. We also believe that depending on FDI/tourism inflows and import performance, pressure on the GEL might subside in August–September 2018.

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