research reports

Highlights 

• US real GDP growth was an annualized 2.0% (third estimate) in 2Q19, after 3.1% growth in 1Q19. Unemployment rate was 3.5% in September 2019, down from 3.7% in August 2019.
• In August 2019, economic growth was 7.6% y/y in Armenia, 7.3% y/y in Kazakhstan, 5.8% y/y in Georgia and 2.2% y/y in Russia, based on preliminary data. In 8M19, real GDP growth was 2.4% y/y in Azerbaijan and 1.1% y/y in Belarus.
• Annual inflation in the US was 1.7% in September 2019, unchanged from the previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 0.8% in September 2019, down from 1.0% in the previous month.
• In September 2019, annual inflation was above the target level in Belarus (5.3%), Georgia (6.4%), Ukraine (7.5%) and Turkey (9.3%); inflation was at targeted level in Russia (4.0%) and within the target range in Kazakhstan (5.3%); inflation was below the target in Armenia (0.5%). Annual inflation was 2.1% in Azerbaijan in September 2019.
• Monetary policy rate increased by 50 basis points to 7.5% in Georgia on 25 September 2019 and has remained unchanged in other countries during end-September -1H of October 2019.
• In October 2019, S&P upgraded Georgia’s sovereign credit rating to BB from BB- with a stable outlook and Ukraine’s rating to B 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.

In Sep-19, total international visitors (tourists and same-day combined) were up 2.7% y/y to 0.78mn persons. Out of total, Georgia hosted 0.53mn tourists (up 0.6% y/y) and 0.24mn same-day visitors (up 7.7% y/y) in September. Slow arrival growth in September like in two previous months reflected significantly reduced arrivals from largest source markets - Russia and Iran. Notably, due to last year’s high base, arrivals from Russia reduced sharper (-20.6% y/y) in Sep-19 compared to two previous months (-7.6% y/y). Meanwhile, arrivals from all other neighbors (Azerbaijan, Armenia and Turkey) continued growing. Notably, arrivals from Turkey are on the rise since Jun-19 after falling from Sep-18 to May-19. 

Please see the full note here, which brings together tourist arrival data for reporting month, most recent statistical information available in the sector and 2019 forecast.

GR released 1H19 unaudited results together with Management Discussion and Analysis. Revenue was up 5.7% y/y to US$ 85.1mn supported by increased freight traffic. Operating expenses, which are mostly GEL-denominated, decreased 14.8% y/y to US$ 65.2mn (-6.6% y/y in GEL). Consequently, adjusted EBITDA improved and reached US$ 35.9mn (+25.4% y/y). Adjusted EBITDA margin also hiked to 42.2% from 35.6% a year ago. GEL’s 17% depreciation against dollar in 1H19 led to a non-cash FX loss of US$ 31.7mn, which dragged down net income to a negative US$ 15.3mn. 

GR’s freight transportation revenue, traditionally the most important revenue category, was up for the first time in the last four years. Revenue stood at US$ 85.1mn up 5.7% y/y. Freight transportation revenue, up 15.4% y/y to US$ 54.1mn, had the largest positive impact on the overall revenue growth in 1H19. Freight handling revenue also increased 10.1% y/y to US$ 11.1mn, while logistic service revenue dropped 35.8% y/y to US$ 8.5mn. Passenger traffic revenue, mostly generated in GEL, also continued growing, up 9.2% y/y to US$ 4.2mn (+19.8% y/y in GEL). Other revenue was up 26.5% y/y to US$ 2.1mn driven by sale of scrap.

GR recognized significant impairment loss in 2018 as a result of impairment testing of its Property, Plant and Equipment (PPE). Due to 5 consecutive years of decline (cumulative drop of 56.1% in 2018 vs. in 2014) in its main revenue stream – freight transportation, GR assets’ value in use was re-assessed and was found to be US$ 272.8 (GEL 691.4mn) lower than the carrying amount. This led to a recognition of the large impairment loss in 2018. 

1H19 operating expenses, which are mostly GEL-denominated, declined 14.8% y/y to US$ 65.2mn. This was mostly caused by significant drop in asset-base (PPE) and related reduction in depreciation expenses (down 36.4% y/y to US$ 15.3mn). On the other hand, employee benefits and electricity and other consumables expenses increased, 8.0% y/y and 7.1% y/y, respectively in GEL terms. However, they still reduced in dollar terms as GEL depreciated.

Electricity consumption growth slowed to 2.3% y/y in 8M19, significantly below forecasted numbers as well as growth levels of previous periods. On supply side, hydrogenation decreased by 9.7% y/y due to unfavourable hydrological conditions. Reduced generation created demand on imported electricity despite the low consumption growth rate. As a result, electricity trade deficit widened 80.5% y/y to US$ 29.6mn in 8M19, and we expect trade deficit to double for the full year of 2019.

The Ministry of Economy revised downwards 2019 electricity consumption growth forecast to 5.7% from initial projection of 13.2%. The revised forecast takes into consideration actual consumption figures of 1H19.

Energy sector was largest FDI recipient in 1H19. FDI in energy sector increased 32% y/y and stood at US$ 112mn.

Importantly, market deregulation process is evidenced by intensified activities from power traders and direct consumers’ increased share in the total electricity consumption mix. The latter increased from 12% of total electricity consumption in 2017 to 21.5% in 8M19, as a result of legislative changes.

Parliament is discussing two energy-related laws - 1) on energy and water supply and 2) on promotion of renewable energy sources. Both laws are expected to be adopted by the end of the year, but the bylaws are set for a longer term.