research reports

In October 2019, total international visitor (tourists and same-day combined) growth accelerated to 8.8% y/y after subdued growth of 3.9% y/y during July-September. Out of total 0.67mn visitors, Georgia hosted 0.43mn tourists (up 7.8% y/y) and 0.22mn same-day visitors (up 10.9% y/y) in October. Strengthened tourist arrivals (+7.8% y/y) in October was supported by significantly increased visitors from Israel (+56.9% y/y), Kazakhstan (139.4% y/y) and EU countries (+32.2% y/y).

Meanwhile, arrivals from neighbors (Azerbaijan, Armenia and Turkey) also continued solid growth, reflected in elevated same-day arrivals (+10.9% y/y). Importantly, significantly reduced arrivals from largest source markets - Russia and Iran, were fully offset by strong arrival growth from other countries. 

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.

Recent months have highlighted the extent of the impact of negative expectations on Georgian macro environment. Growth remained strong at 5.7% in 3Q19, but excessive GEL depreciation saw inflation rise to 6.9% in October – higher than initially forecast. External demand and fiscal policy remain the key growth drivers in 2019. Separately, construction has recovered in recent months and domestic investment is increasing, supported by bank credit. In addition, S&P followed Fitch and Moody’s in upgrading Georgia’s sovereign credit rating by one notch in October 2019.

Amid a continued improvement in the external balance, the GEL, at close to 3.0/US$, was significantly undervalued through July-October. With currency weakness triggering inflation, the NBG conducted currency interventions, tightened policy, and decreased the reserve requirement on FX deposits, but to no great effect. We do not see the need for further rate hikes to address medium-term inflation trends (annual inflation is already likely to converge to the 3.0% target from 2Q20), but we expect the NBG to relax FX liquidity further to support the GEL. We also believe that the NBG needs to adopt a more balanced approach to de-dollarization as growth in GEL lending along with a lack of confidence in the GEL and a related increase in dollar deposits have proved to be one of the major factors in the currency’s weakness lately. In our view, this could be addressed by reducing the floor on GEL lending. This is also desired considering reduced FDI and government’s shift to domestic borrowing in 2019 revised budget and beyond. We acknowledge benefits of de-dollarization process, but we see this as a long-term process through capital market development. 

If the GEL stabilizes at the current level of 2.96/$ over the next few weeks, this would imply that annual inflation could remain close to 7.0% through end-year. Deceleration in price growth from 2Q20 will likely enable the NBG to cut rates by 100-150 bps in 2020, in our view.

After recent monetary policy tightening, we keep our growth forecast at 4.5% for 2019, but see pressure on growth in 2020. Monetary policy rate hikes will soften demand for GEL lending, but growth in FX liquidity will keep FX interest rates low, thus supporting bank lending in FX. Therefore we expect bank lending to grow above the nominal GDP growth rate in 2020.

Strong growth in exports and a drop in oil and import-intensive FDI have improved the external balance markedly, resulting record low current account deficit of 4.6% of GDP in 1H19. We expect a weaker currency to trigger further improvement in the trade balance, supporting a better-than-expected improvement in the current account deficit to below 5.0% of GDP in 2019.

Budget spending is smoother this year with fiscal deficit at 37% of annual plan in 9M19, compared to the surplus a year ago. 2020 budget framework remains healthy with the deficit at 2.7% of GDP and current spending at 23% of GDP despite significant growth in social spending. 

We expect Georgia to deliver 4.7% growth in 2020, supported by external demand and domestic investment. If the NBG keeps the policy rate unchanged throughout 2020 and parliamentary elections weigh on business confidence, 2020 growth could soften to 4.0%. If Russia’s ban on direct flights is lifted, this could produce a positive shock to growth. Additionally, Georgia’s Prime Minister has recently met with a number of corporate sector representatives to address different issues hindering business decision-making in the country, which bodes well for future growth. Government also requested extension of ongoing IMF program by one year to strengthen credibility of government policies.

GOGC released 1H19 unaudited results. Revenue was up 17.8% y/y to US$ 160.4mn in 1H19, mostly due to a 19.8% y/y (US$ 106.7mn) increase in sale of gas. Revenue from electricity generation, second largest revenue category, was also up 21.6% y/y, while GEL-denominated gas pipelines rental revenues were down 7.1% y/y. Meanwhile, operating expenses increased 14.9% y/y to US$ 130.9mn in 1H19. Higher revenues helped adjusted EBITDA to grow by 21.7% y/y to US$ 36.5mn. Notably, more than 90% of the construction works on Gardabani II CCPP have been completed as of October 2019. GOGC’s strong financial position is attested by a one-notch rating upgrade from S&P in October 2019 to BB- outlook stable.

GOGC’s 1H19 revenue was up 17.8% y/y to US$ 160.4mn, driven by increased gas sales revenue (+19.8% y/y to US$ 106.7mn). Gas demand was mostly affected by increased demand from TPPs as well as from commercial sector. Notably, increased demand from TPPs was a result of reduced hydro generation in 1H19 (down 9.7% y/y) due to unfavorable hydrological conditions. Importantly, gas sales to commercial sector were recorded for the first time, and this new category lifted average gas sale price to US$ 126.6/mcm in 1H19 compared to 115.5/mcm in 1H18.

Gardabani TPP operated for 165 days during 1H19, compared to only 134 days in 1H18, as hydrogenation reduced. As a result, revenue from electricity generation was up 21.6% y/y to US$ 40.6mn in 1H19 (25.3% of total). Rent from gas pipelines is the only GEL-denominated revenue category for GOGC since September 2017, when an annual fixed GEL 42mn fee was introduced. Consequently, GEL’s 10% depreciation against dollar in 1H19 (vs. 1H18 average) reduced pipeline rental revenue in US-terms by 7.1% y/y to US$ 7.9mn, while in GEL terms income remained flat. Oil transportation revenue declined 15.1% to US$ 3.6mn, as crude oil throughput in WREP was down. Significant growth in revenue from crude oil sales (up 70.8% y/y to US$ 1.6mn), which makes up only 1% of total revenue, was partially driven by increased volumes (up 53.9% y/y) as well as higher global crude oil prices.

1H19 operating expenses were up 14.9% y/y to US$ 130.9mn. Cost of gas, largest expense category, which combines gas purchased for resale (85% of cost of gas) and gas used by Gardabani I, grew 19.6% y/y to US$ 114.5mn. Gas costs for resale increased in both, volume (+12.8% y/y) and price (+ 3.8% y/y) terms. As a result this category was up 16.7% y/y to US$ 97.9mn. Cost of gas used in electricity generation also grew 39.9% y/y to US$ 16.7mn as demand on gas from Gardabani I increased in the reporting period. Other expenses, accounting for 12.5% of total, decreased 9.9% y/y to US$ 16.4mn helped by GEL’s depreciation in the period.

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.