research reports

Highlights

• Real GDP growth in the US was revised up to an annualized 4.2% y/y (second estimate) from an annualized 4.1% y/y (advance estimate) in 2Q18. In August 2018, unemployment rate was unchanged at 3.9%. Turkey’s economy grew by 5.2% y/y in 2Q18 after growing 7.3% y/y in 1Q18.
• Based on rapid estimates, in July 2018, economic growth came in at 11.1% y/y in Armenia, 4.6% y/y in Georgia, 3.8% y/y in Kazakhstan, and 2.8% y/y in Russia. In 7M18, real GDP growth was 4.4% y/y in Belarus and 0.2% y/y in Azerbaijan.
• In August 2018, annual inflation in the US was 2.7% down from 2.9% in previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 2.0% in August 2018 down from 2.1% in July 2018.
• In August 2018, annual inflation was close to the target level in Georgia (3.1%), Russia (3.1%) and Armenia (3.3%); inflation was within the target range in Kazakhstan (6.0%), and above the target in Ukraine (9.0%) and Turkey (17.9%); inflation was 2.0% in Azerbaijan.
• Monetary policy rate increased to 7.5% (from 7.25%) in Russia, 18.0% (from 17.5%) in Ukraine and 24.0% (from 17.75%) in Turkey as of September 18, 2018. The policy rate has remained unchanged in other countries.
• In August 2018, Moody’s and S&P downgraded sovereign credit ratings for Turkey: 1) Moody’s lowered credit rating to Ba3 from Ba2 and the outlook was revised to negative from stable, and 2) S&P lowered credit rating to B+ from BB- (for foreign currency) and to BB- from BB (for local currency) and the outlook remained unchanged at stable.

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

Energy sector is one of the strategically important sectors under newly adopted Public-Private Partnership law. The legislation, among others, envisages the possibility of granting long-term guaranteed purchase agreement to the investor. The law on Public-Private partnership was approved by the Parliament of Georgia in May 2018. Later in August 2018, the government of Georgia adopted the rule for PPP projects screening and implementation. These documents define the general framework for PPP projects initiation, partner finding and monitoring.

The project initiation and private partner finding process under PPP framework is generally led by special entities, based on transparent and competitive principles. The energy sector has some exemptions from general rules, e.g: for the projects larger than 100MW, the initiation process must include feasibility study conducted by independent company; all energy sector PPP projects should be agreed with the government despite the size of the project; private companies are allowed to initiate the project; the Government has right to allow closed and direct negotiations with only one partner, skipping the public tendering and evaluation procedure.

The export season of 2018 ended with total export of 588.3GWh (-9.9% y/y). The decrease in 7M exports is explained by: 1) last year’s high base due to unexpected surplus in hydro generation, 2) disruption of export caused by Enguri’s emergency closure in May-2018, 3) low prices on Turkish market, incentivizing companies with TDAs (e.g. Georgian Urban Energy) to sign additional agreements with the GoG and limit export to only May-July period in favor of increased local supply.  Although the volume of exported electricity was down, its total value increased by 13.8% y/y to US$ 19.0mn, as Russia’s share (which pays low price vs other markets) in total exports decreased y/y. The electricity trade deficit stood at US$ 11.8mn in 7M18 and was down 40.8% y/y as growth in exports partly absorbed imports.

Domestic electricity consumption increased 10.8% y/y in July 2018 and 8.8% y/y in 7M18. The eligible consumers and distribution licensees drove this growth. The demand was satisfied by hydro generation in July 2018. Hydro Generation increased slightly (+1.5% y/y) and reached 1.3TWh, supported by good hydrological conditions and commissioning of new HPPs. Meanwhile, the maintenance works on some regulated HPPs dragged the supply. Enguri/Vardnili generation (+11.2% y/y) satisfied 65.9% of electricity demand in July 2018. In 7M18 generation of Enguri/Vardnili increased 24.8% y/y and reached its record high generation since 2010 (3.2TWh). Thermal generation and imports accounted for 0.7% of total electricity supply, used only for system’s balancing and stability purposes.

Tourism is booming: visitor trips (tourist trips and same-day trips combined) were up 16.4% y/y to 3.0mn in 1H18. Tourist trips drove the growth, reaching 1.9mn visitors and accounting for 64.5% of the total in 1H18. This comfortably translates into our total tourist trip forecast for 2018 of 4.9mn. Leisure and recreation is the predominant purpose of visits to Georgia, and visitors enjoy Georgian cuisine the most. With Georgia’s regions attracting a growing number of visitors and the regional accommodation market undersupplied, the timing for the hotel development in Georgia’s regions looks right.

Tourist trips drove growth, accounting for 64.5% of total in 1H18. Tourist trips rose 22.9% y/y to 1.9mn in 1H18, which we expect to comfortably translate into our total tourist trip forecast for 2018 of 4.9mn.

We expect tourist trips to reach nearly 9mn by 2022. We have revised our forecast upwards and now expect 8.8mn tourist trips in 2022 (up from 7.6mn previously), or 2.4x the country’s population based on a new methodology (see Table 1 and Box 1 for clarification). This increase will see Georgia overtake Hungary (1.6x), Slovenia (1.5x), Albania (1.4x) and Bulgaria (1.2x) according to their 2016 ratios. However, this would still be below the proportions found in Croatia (3.3x), Cyprus (2.7x) and Montenegro (2.7x) in 2016.

Highlights

• 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.