research reports

• IMF updated its World Economic Outlook in June 2020, slashing the 2020 global growth by 1.9ppts to negative 4.9% compared to April 2020 projections. Among the regional economies, detailed forecast is available only for Russia, with 6.6% contraction (vs. 5.5% in April 2020 update) expected in 2020, while Emerging and Developing Europe is forecasted to shrink by 5.8%. The IMF team expects a partial rebound in output from 2021, with global economy expected to grow by 5.4%, however this level is 6.5ppts lower compared to the pre-COVID-19 projections.
• The IMF underlined the degree of disconnect between the financial markets and real economy. Credit spreads have significantly narrowed, trimming c. 70% of recent widening. The report highlighted that the US investment grade corporate bond spreads are quite low, against higher spreads experienced during other economic shocks.
• Most of the regional central banks cut monetary policy rates during June. Notably, Georgia lowered key rate by 25bps to 8.25%, Armenia by 50bps to 4.5%, Azerbaijan by 25bps to 7.0%, Belarus by 75bps to 8.0%, Ukraine by 200bps to 6.0%, and Russia and Turkey cut the rates by 50bps to 4.5% and 8.25%, respectively. Kazakhstan and Uzbekistan have kept policy rates unchanged, at 9.5% and 15.0%, respectively. 
• Exchange rates in most of the regional countries stabilised. GEL gained the most against USD during June, appreciating by 3.2%, KZT also strengthened by 1.5% in the same period. Other currencies remained mostly flat, with AMD and UAH appreciating slightly (+0.8% and +0.6%, respectively) and BYN and TRY losing value slightly (-0.3% and -0.4%, respectively), while RUB depreciated 1.5% during June. 
• The market sentiments on the regional Eurobonds were mixed during June. UKRAINE 21 (4.6% YTM; 103.5 price) performed strongest, with the yield decreasing by 214bps in June, followed by TURKEY 21 (3.1% YTM; 100.3 price) down by 94bps during June. AZERB 24 (2.8% YTM; 106.7 price) and RUSSIA 23 (1.3% YTM; 109.2 price) gained 36bps and 17bps in yield, respectively. BELARUS 23 (6.7% YTM; 100.4 price) was the worst performer in June, with the yield increasing by 147bps, followed by ARMENIA 25 (4.2% YTM; 112.7 price) up by 42bps and GEORGIA 21 (3.8% YTM; 102.3 price) up by 20bps. Yield on UZBEK 24 (3.1% YTM; 105.5 price) increased slightly, up by 12bps, while KAZAKH 24 (1.7% YTM; 109.2 price) remained mostly flat.
• Among Georgian placements, GOGC 21 was the top performer with the yield dropping by 213bps in June, while another quasi-government GRAIL 22 decreased by 54bps in the same period. Among the Georgian banks, yield on BOG 23 dropped most, down 140bps in June, while yield on TBC 24 remained mostly flat (up 3.1bps). Yield on GEOCAP 24 widened by 25.1bps, while SILKNET 24 performed relatively better, with the yield decreasing by 85bps in June. 

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

Covid-19 pandemic has highlighted the importance of local production and the need to diversify supply chains, as companies were paralyzed by the disruptions of their supply chains after China’s lockdown. According to analysts, this pandemic will significantly change the world economic model for the next decade - economies will become more autonomous, focusing on the regional concentration of supply chains and meeting regional demand.

In recent years, Georgia’s economic growth was driven by services, with tourism being a catalyst and boosting also trade, construction, and other services sectors. The share of services in the Georgia’s economy increased from 60% to 78% over 2009-2019. However, most of the revenue generated from these sectors were driving imports, as production base was low – we estimate that out of US$ 3.3bn revenues from tourism in 2019, only US$ 1.3bn was retained in the economy.

Georgia's new economic growth model should focus on enhancing production potential. In this regard, both the stimulation of local companies and the attraction of foreign investments are crucial.

We see production potential in agriculture in the following areas: meat and dairy products, grains, vegetables and fruits, food processing. In this regard, Georgia has the potential to substitute imports worth of US$ 400mn and also to diversify exports. Land consolidation and low productivity remain the main challenges in this sector.

Construction sector is very import-intensive, and we estimate that by encouraging local production in certain areas, it will be possible to substitute imports worth of US$ 450mn. According to preliminary estimates, production of the following products is feasible: wires and cables, re-bars, plastic materials, paints, furniture, electric water heaters, articles of iron and steel, wood materials, ceramic products, cement clinker.

Georgia needs new strategy to attract FDI, especially considering increased competition globally. We see potential for attracting foreign investments in the following sectors: textile, apparel and leather manufacturing, manufacturing of automobiles & auto parts, pharmaceuticals and other chemical production, manufacturing of home electronics, transport and logistics, business process outsourcing. At the same time, the qualification of the labor force and the shortcomings in infrastructure are one of the main obstacles for FDI attraction along with the judiciary system.

Tourism Challenges in the Second Half of 2020

Gas margin squeeze

GOGC released audited FY19 results. Revenue was up 23.2% y/y to US$ 312.4mn. This growth was entirely driven by gas segment, making up 65% of 2019 revenue. Demand for social gas increased in 2019, as consumption from TPPs and households were up. Notably, unusually dry season led to an increased demand from TPPs, as they operated at full capacity for longer period. In addition, the company started commercial gas sales, which lifted average gas sale price to US$ 128.0/mcm in 2019 compared to 115.5/mcm in 2018. 

On the back of increased demand, it became necessary for GOGC to acquire large portion of expensive ‘Additional Gas’ from SOCAR which caused hike in weighted average gas purchase price (+24.1% y/y). As a result, gas supply margin almost halved to 12.3% in 2019 from 24.1% a year before. Other segments remained mostly stable in 2019. Due to deterioration in gas segment, adjusted EBITDA margin fell from 33.6% to 21.8% over 2018-19. 

We expect 2020 EBITDA to remain under pressure, due to lower sales price agreed upon COVID-19 related social pressures. We forecast gradual rebound in profitability from 2021, helped by electricity generation unit and reduction in average gas purchase price (as throughput in SCP is expected to increase substantially). Net-debt-to-adjusted EBITDA ratio jumped to 3.02x in 2019 from 1.5x in 2018, mostly due to lower profitability coupled with significant depreciation of GEL. 

GOGC intended to refinance the US$ 250mn Eurobond due in April 2021 in 1Q20, however COVID-19 related disruptions in the financial markets prevented the company to secure financing. The company plans to refinance the bond by tapping international debt markets by 1Q21. However, considering current market instability, GOGC is also in active negotiations with IFIs to pre-agree alternative financing option. 

Due to pandemic related economic slowdown Fitch revised company’s stable outlook to negative in April 2020 in line with that of Sovereign. 

Please see the full report for detailed coverage of GOGC’s FY19 performance.