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Macroeconomic Overview of Georgia

15 Feb, 2021

Macroeconomic Overview of Georgia

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Regional Fixed Income Market Watch, January 2021

5 Feb, 2021

In January 2021, IMF updated its World Economic Outlook and Global Financial Stability Report. The IMF team has revised upwards global economic growth in 2021 by 0.3ppts to 5.5%, noting that the strength of the recovery will vary significantly across countries. This revision reflects vaccination rollout and additional policy support from some large economies. The IMF expects 3.0% growth in Russia in 2021, up 0.2ppts from October forecast. In their Financial Stability Report, IMF noted that earlier-than-anticipated appearance of multiple vaccines helped risk sentiments and pushed equity markets further. However, the risks of market correction still persist, if investors reassess growth prospects or the policy support.

Emerging markets (EM) started the year strongly, with US$ 53.5bn portfolio inflows, of which US$ 9.4bn went into equity markets, while the rest in debt instruments, according to Institute of International Finance. IMF also stressed large financing needs of EMs in 2021, with Turkey and Ukraine in need of external financing ranging between 25-30% of the GDP. 

In January 2021, regional sovereign Eurobonds traded mixed. Yields on UKRAINE 21 widened by 56pbs to 2.4% with the spreads over RUS 23 and GEORGIA 21 reaching 153bps and 125bps, respectively (up from 83ps and 100bps from end-2020). Yield on GEORGIA 21 reached 1.2% by end January, up from 0.8% as of Dec-2020 (likely related to lack of liquidity and upcoming maturity). Yields on UZBEK 24 and BELARUS 23 slightly widened (+20-30bps) in January, while other sovereigns from the region performed relatively well in January. 

In January 2021, Armenia tapped the international debt markets, pricing its 3rd sovereign Eurobond – a US$ 750mn, 3.6% coupon, 10-year maturity instrument. Notably, due to strong investor interest initial size of the bond was increased from US$ 500mn to US$ 750mn.

Among Georgian corporate placements, GRAIL 22 was the best performer, with the yield down by 90bps, while the spreads over comparable railway companies narrowed, with the spread over RUS RAIL 22 down from 280bps in end-2020 to 175bps by end January 21. Other corporate Eurobonds also performed strongly, with the yields on Silknet, CGEOLN (GGU) and GEOCAP down by 30-44bps. Georgian banks traded mixed in January, with the yield on TBC 24 down by 42bps, while BoG 23 widening slightly, by 10bps in the same period.

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

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Regional Fixed Income Market Watch - 2020 Year in Review

29 Jan, 2021

COVID-19 pandemic pushed the global economy into one of the deepest recessions in 2020 on record. In its January 2021 update, IMF estimates global growth contraction for 2020 at 3.5% and growth rebound at 5.5% is projected in 2021, reflecting expectations on vaccination and additional policy support in some large economies. The countries in the region were hit by double shock in 2020 - one from the pandemic and another from country-specific disruptions. However, COVID-19 related health crisis had different effects on regional economies depending on demographics and share of services sectors in GDP. During the 2nd wave of the virus lockdown measures were strict in Georgia; Azerbaijan and Ukraine also tightened restrictions, while other countries chose softer measures. Currently, active cases per 100,000 persons remain high in Ukraine, followed by Russia, Armenia and Georgia. 
• Oil price shock put additional strain on oil-dependent economies of the region - Azerbaijan, Kazakhstan, Russia. However, large reserves, low levels of debt and continued government stimulus have helped oil-exporters to fare well against the pandemic-related disruptions, with GDP contraction ranging between 3.4-4.3% in 2020. 
• The military conflict in Nagorno-Karabakh worsened risk sentiments in the region, particularly for Armenia. Although a ceasefire agreement in November 2020 improved the situation, the resulting domestic political turbulence in Armenia caused rating downgrade from Fitch (the only downgrade in the region by Fitch). Economic contraction in Armenia is estimated to be the highest among the regional countries in 2020 at -7.2%. 
• Belarus, surprisingly posted one of the lowest economic contractions among the regional peers, estimated at -0.9%. Absence of strict lockdowns and resilient exports helped the country. However, political tensions following the 2020 presidential elections, high share of state-owned entities and possible external sanctions weigh on the economic outlook. 
• Turkey (0.6%) and Uzbekistan (1.6%) were the only countries in the region posting positive economic growths in 2020. Turkey faced double-digit inflation and massive depreciation of Lira caused by Erdogan’s unorthodox economic policies, while growth in Uzbekistan was supported by gold price rally, the main export category for the country as well as swift support from IFIs. 
• Ukraine’s economy is estimated to contract by 5.2% in 2020. Apart from pandemic-related economic disruptions, growth was adversely affected by reduced agriculture output (holding largest share among other regional countries) due to droughts. 
• Georgia’s economy contracted by 6.1% in 2020 as recovery dynamics of 3Q was reversed by 2nd lockdown from end-November. Absence of tourism hit hardest Georgia, where tourism inflows hold the largest share in the economy among the regional peers. 
• In 2021, all countries in the region are expected to return to the positive growth trajectory considering vaccinations, gradual lifting of lockdown restrictions, and improved domestic and external sentiments. We expect the largest growth rebound in 2021 in Georgia, Uzbekistan and Turkey. 
• Inflation pressures increased by end-2020 in most regional countries due to exchange rate pass-through coupled with increased commodity prices globally. Georgia recorded the lowest inflation level among the peers (see details). We expect price pressures to continue in 2021, reflecting rebound in demand and sustained increase in world commodity prices.
Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Ukraine, Russia, Turkey, Uzbekistan.

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Georgian Economy- Inflation Expectations

5 Jan, 2021

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/$. 


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