research reports

In December 2020, CPI inflation came in below expectations. There was 1.0% deflation m/m, while annual inflation rose 2.4%. NBG’s inflation expectation for the 4Q was above 3.0% inflation target in its Monetary Policy Report published in November 2020, while we expected end-year prices at 4%. The main reason behind lower than expected inflation in December was government subsidies for utility bills, subtracting 1.94ppts from overall inflation rate. The core inflation (excluding food and energy prices) remained high at 5.3% y/y compared to the headline, as food price dynamic and low energy prices along with lower utility bills dragged headline inflation down. The exchange rate pass-through could be one of the factors to affect non-food prices, given higher share of imports in the domestic non-food market. Meanwhile, inflation in services remained muted due to both quarantine restrictions and absence of international tourism. 

Utility subsidies drove CPI inflation down 
In December, prices decreased in 4 out of the 12 main spending groups on an annual basis. The largest contribution came from utility category, where prices decreased by 21.7% y/y (with water supply prices down 36.5% y/y, and electricity, gas and other fuels prices down 30.1% y/y), pulling annual inflation down by 1.94ppts in December. Based on Geostat, this reduction reflected utility (electricity, gas and water) subsidies for low-energy consumers by government for 4 months (from November to February), based on government decree of 30 October 2020 (notably, the same subsidies have not been considered by Geostat in spring and November 2020). The prices reduced slightly in 3 other categories: clothing and footwear (-0.9% y/y), transport (-2.3% y/y) and recreation and culture (-2.8% y/y). The prices increased in 7 out of 12 categories, while prices remained flat in communication. In food and non-alcoholic beverages category (with largest 31.3% share in consumer basket), the prices increased by 6.8% y/y adding 2.19ppts to the overall annual inflation rate. Within the group the prices of most of the goods increased, while the prices decreased for fruit and grapes (-4.5% y/y). In healthcare category the prices went up by 9.6% y/y, contributing 0.76ppts to the overall annual inflation rate. 

Expectations on inflation 
In the coming months, the inflation outlook expected to be driven by the balance of inflationary and disinflationary risks, exchange rate developments, along with domestic demand: 
• The uncertainty over the balance of disinflationary and inflationary risks prevail more in 2021 than in 2020. On the one hand, utility subsidies for households already in place for January and February and prolongation of subsidies for low energy users communicated by the government to mitigate recent rise in utility prices will push inflation down. On the other hand, utility price increase for commercial users will ultimately be reflected in final prices as increase in supply-side costs and the effect of the pandemic reduce incentives to price competition. 
• We expect an economic recovery from 2Q21 and inflation at 4.5% in 2021. The key indicators to determine monetary policy decisions, in our view, are: 1) GEL exchange rate, 2) risks related to more prolonged pandemic/quarantines effects, and 3) sustained growth in world commodity prices. In our view, these factors will impede a disinflation momentum and delay key rate cut. Furthermore, as utility subsidies will continue in 2021 we see core inflation dynamic to be more relevant for evaluating price dynamic and monetary policy considerations. We see more chances for the key rate cut in 2H21 if tourism resumes and GEL appreciates against dollar at 3.1/$. 

Railway cargo transportation came under significant pressure in 3Q20, while overall transportation volumes going through Georgia remained on the positive trend. Freight transportation, which is the largest revenue stream for the company, dropped by c. 17% y/y in 3Q20, driven by lower transportation volumes (-7.0% y/y) as well as lower revenues generated per km. Other related segments also declined, while passenger traffic operations remained limited despite opening of the economy in the summer months. 

GR generated US$ 118.9mn in revenue (-9.3% y/y) and US$ 54.2mn in adjusted EBITDA in 9M20. Weaker GEL on the one hand and deteriorated profitability on the other were the main reasons behind high leverage, with net debt to EBITDA standing at 6.27x, significantly higher than Eurobond covenant. 

The company is actively working with IFIs and international investment banks to secure financing for the upcoming Eurobond maturity..

In November 2020, Fitch affirmed GR’s Long-Term rating at 'BB-' with Negative Outlook. Ties with the state and financial implications of default were assessed strong, resulting in one-notch differential between the ratings of Government and GR.

Please see the full report for detailed coverage of Georgian Railway’s 9M20 performance.

The pace of economic recovery in Georgia has been affected by post-election street protests and re-imposition of lockdown measures amid surge in COVID cases. The government announced a fresh support program for affected businesses and households in the amount of GEL 1.1bn. We note that a reduction in virus cases recently and minimal changes in the new cabinet will help to improve sentiments and minimize delays in decision making. In 2021, the fiscal policy continues to have a central role in stabilizing the economy with deficit set at 7.6% of GDP, and capex at 8.1% of GDP. We note that the deficit funding structure is also GEL supportive with government planning to rollover Eurobond in 2021, preserving international reserves. We see recovery in tourism as a key factor for GEL in 2021, otherwise we do not rule out the rate increase from NBG to support the currency along with FX interventions. We expect economy to rebound to 5.0-5.5% growth in 2021 assuming tourism to recover to 50% of its 2019 level; without recovery in tourism we expect growth at around 3.7% in 2021. Notably, the new cabinet of Prime Minister Gakharia faces a confidence vote this week, as well as a 2021-24 government program – “Building of a European State”.

Challenge and response

Despite challenging environment, the pace of decline decelerated in 3Q20 for Silknet. Although strict lockdown measures were lifted from late May, the absence of international tourists and certain restrictions for various businesses put pressure on telecom sector in Georgia. With recovery in economic activity and introduction of “unlimited data packages” in summer months, mobile data revenue jumped by 21.1% q/q in 3Q20, however this was insufficient to compensate losses in more traditional mobile revenue streams (SMS, mobile accessories) and fixed broadband income. 

Silknet generated GEL 258.2mn (up 1.0% y/y, US$ 84.5mn) in commercial revenues in 9M20, reflecting strong performance in 1Q20 and slightly lower revenues in 2Q and 3Q (down 2.5% y/y and 2.1% y/y, respectively). On a positive note, Silknet maintained strong profitability metrics, earning GEL 156.9mn (US$ 51.3mn) in EBITDA in 9M20, translating into an impressive EBITDA margin of 55.4%. Notably, on the back of weaker revenue generation, the company’s profitability came under pressure during 3Q20, with EBITDA (incl. IFRS) down 7.8% y/y. Weaker GEL was the main reason behind the deterioration of Net-debt-to-EBITDA ratio, which jumped to 3.04x as of September 2020.

In November, Silknet issued Georgian Depositary Notes, which aim to enlarge the pool of fixed income investors in Georgia.

Please see the full report for detailed coverage of Silknet’s 9M20 performance.