research reports

Parliament adopted two energy-related laws: 1) Law on Energy and Water Supply - important roadmap for the energy sector reform process and 2) Law on Promotion of the Production and Use of Energy from Renewable Sources (Renewable Energy law) – setting renewable energy targets and implementation deadlines. The laws define general framework of the upcoming markets and give guidelines for transition period. The laws also set deadlines and responsible bodies for the adoption of secondary legislation, which should define the most important details of market organisation and action plans of their implementation. Importantly, donor organisations are actively involved and assisting Georgia in this transitional process.

Energy community membership also obliges Georgia to adopt three other laws by end of 2019, currently under discussion in the parliament. These laws are: 1)Law on Energy Efficiency - setting energy efficiency targets for the country and encouraging energy savings, 2)Law on Energy Performance of Buildings - tightening the construction norms in 2020 and enforcement of penalties from2021, 3)Draft law on Energy Labelling - will force all consumer electronics vendors to include energy-related information on the product label. The list of information and form of labelling will be set during 2020, and penalties for non-compliance to these norms will come into force from 2021. The timeframes mentioned in the draft laws may change during its review and approval process.

Electricity trade deficit widened by 29.7% y/y to US$ 58.2mn in 11M19. Electricity consumption increased by mere 1.6% y/y, significantly below forecasted numbers as well as growth levels of previous periods. On supply side, hydrogenation decreased by 9.2% y/y due to unfavourable hydrological conditions. Reduced hydro generation created demand on electricity imports (+10.5% y/y) and thermal generation (+29.4% y/y), despite the low consumption growth rate. Importantly, 36% of imported electricity came from Russia in 11M19. 

GNERC revised tariffs for Khrami 1 and Khrami 2 to 10.837 Tetri/kWh (+18.5% y/y) and 12.304Tetri/kWh (+15.9% y/y), respectively. These tariffs are set from Dec-19 until Dec-21. Notably, Khami 2 HPP’s has the highest regulated tariff on the market, which, according to current market rules, is used as reference price of balancing electricity, purchased by the ESCO from deregulated small capacity HPPs. Respectively, after enforcement of new tariffs on Khrami cascade in Dec-19, the purchase price of balancing electricity will increase to 12.304 Tetri/kWh from the current 10.614 Tetri/kWh.

Thermal power plant Gardabani-2 has been put into test mode. The 250 MW plant is equipped with modern technologies and will be able to produce electricity more efficiently than the old ones. Unlike other TPPs, Gardabani-2 will not receive a guaranteed capacity fee. Its income source is a 14-year guaranteed power purchase agreement for 1,200kWh annually at USc 5.5/kWh. The owner of Garabani-2 TPP is the state-owned company - Georgian Oil and Gas Corporation. 

GR released 9M19 unaudited results together with Management Discussion and Analysis. Revenue was up 3.8% y/y to US$ 131.1mn in 9M. This increase was mostly driven by higher freight transportation revenue (US$ 81.2mn) reflecting pick up in dry cargo volumes (+17.5% y/y to US$ 48.4mn). Operating expenses declined 16.2% y/y to US$ 95.7mn in 9M19, mostly due to lower depreciation expenses. As a result adjusted EBITDA improved by 22.6% y/y to US$ 60.4mn with adjusted EBITDA margin climbing 7.1ppts y/y to 46.1% in 9M. Despite better operating performance the bottom line was negative US$ 23.0mn in 9M caused by GEL-depreciation related non-cash FX loss (US$ 45mn) and impairment loss on trade receivable (US$ 8.1mn).

Freight transportation, the largest revenue category for GR, continued growth in 3Q19, with revenue up 14.4% y/y to US$ 81.2mn in 9M19. Notably, surge in dry cargo transportation (up 17.5% y/y to US$ 48.4mn) had the largest effect on the overall cargo transportation revenues. Freight handling also increased, up 10.8% y/y to US$ 16.8mn. On the downside, logistic service revenues dropped 34.6% y/y to US$ 13.9mn and freight car rental revenue also declined 5.6% y/y to US$ 7.0mn. Meanwhile passenger traffic revenue increased by a mere 1.0% y/y (though up 12.8% y/y in GEL) in 9M19. Other revenues, accounting for just 2.3% of total, were up 27.0% y/y to US$ 3.0mn due to increased sales of materials and scrap.

9M19 operating expenses were down 16.2% y/y to US$ 95.7mn, as depreciation expenses reduced. End 2018 reduction in asset-base due to the significant impairment loss recognition reduced GR’s depreciation expenses by 34.4% y/y to US$ 23.4mn in 9M19. Employee benefits and electricity and other consumables, where the only categories that increased in GEL terms up 6.4% y/y to GEL 117.3mn and 2.7% y/y to GEL 33.8mn, respectively. While in USD, every cost item declined in 9M19, explained by GEL’s depreciation.

Highlights 
• US real GDP growth was revised upward to an annualized 2.1% (second estimate) from an annualized 2.0% (advance estimate) in 3Q19. Annual inflation in the US was 2.1% in November 2019, up from 1.8% in previous month. Unemployment rate was 3.5% in November 2019, down from 3.6% in previous month. Target range for the federal funds rate was kept unchanged at 1.5%-1.75% in December 2019 in line with expectations. 
• EU19 real GDP growth was 1.2% y/y in 3Q19. Based on the Eurostat flash estimate, annual inflation in EU19 was 1.0% in November 2019, up from 0.7% in previous month. Unemployment rate in EU19 was 7.5% in October 2019, unchanged from previous month. In December 2019, ECB kept the interest rate unchanged on the main refinancing operations, the marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.50%, respectively. 
• Turkish economy increased by 0.9% y/y in 3Q19 after 1.6% y/y reduction in 2Q19. 
• In October 2019, economic growth was 7.7% y/y in Armenia, 5.7% y/y in Georgia, 5.4% y/y in Kazakhstan and 3.1% y/y in Russia, based on preliminary data. In 10M19, growth was 2.1% y/y in Azerbaijan and 1.1% y/y in Belarus. 
• In November 2019, annual inflation was above the target range in Georgia (7.0%) and Turkey (10.6%); inflation was below the target in Armenia (1.0%) and in Russia (3.5%), while it was within the target range in Kazakhstan (5.4%) and close to the target in Ukraine (5.1% y/y). Annual inflation was 2.4% in Azerbaijan in November 2019. 
• As of 19 December 2019, monetary policy rate increased by 50 basis points to 9.0% in Georgia, while it was cut by 25 basis points to 7.5% in Azerbaijan and to 6.25% in Russia, by 50 basis points to 9.0% in Belarus, by 200 basis points to 12.0% in Turkey and to 13.5% in Ukraine. 
• In November 2019, Fitch upgraded Armenia’s rating to BB- from B+ with a stable outlook.

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

Despite strong development in recent years, Tbilisi’s real estate stock is outdated and still dominated by old buildings. Less than 25% of existing residential, retail and office real estate is built according to modern standards, demonstrating the sector’s strong growth potential.

Residential – Promising fundamentals
Office – Price-to-quality set to rise
Retail – Fuelled by consumer behavior
Hotels – Need to attract high-spending tourists
Development land – Prices are rising

Tbilisi Real Estate Market Outlook - In Need of Modernization
Tbilisi Real Estate Market Outlook - In Need of Modernization GEO 
Tbilisi Real Estate Market Outlook Presentation GEO