research reports

Macroeconomic Overview of Georgia

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

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/$.