research reports

Georgia’s macroeconomic overview – latest forecasts and trends (presentation).

2020 turned out to be a challenging year for Silknet. On the one hand COVID-19 related lockdown and stay-at-home orders boosted mobile data revenues (+14.4% y/y), on the other hand more traditional revenue streams (mobile voice and SMS) came under pressure. Notably, mobile data traffic skyrocketed in Georgia in 2020, with Silknet achieving the highest growth in per user data usage, but still below the levels used by Magticom’s subscribers. In addition, absence of tourism negatively affected mobile segment, particularly roaming revenue. Lockdown measures also halted the growth pace of traditionally fast-growing fixed segment for Silknet (fixed broadband and pay-TV). 

Overall, Silknet generated GEL 382.2mn in 2020 in revenue (-GEL 5.0mn y/y or -1.3% y/y), while commercial revenue (91% of total) posted a marginal 0.4% y/y growth in 2020. The competition in Georgia’s telecom industry remained intense in 2020. Silknet managed to increase market share in mobile segment by revenue (+0.65ppts to 36.5%) due to higher ARPUs, while Magticom maintained a solid 45.5% market share by mobile revenues (down 62ppts over 2019-20). Despite slowdown in customer acquisition in fixed broadband segment, Magticom managed to add c. 19,000 new subscribers due to its rural penetration strategy, bringing its market share up 0.5ppts to 48.9%, while Silknet added only c. 5,000 subscribers. In pay-TV segment, Silknet added c. 18,000 new subscribers, grabbing 1.9ppts in market share, while Magticom’s subscriber base remained mostly unchanged in 2020. 

Silknet generated GEL 211.5mn in EBITDA in line with our projection in 2020, translating into an EBITDA margin of 55.3% (vs. 55.8% in 2019). Slight decline in profitability was due to higher operating expenses (software maintenance, pay-TV content). 

We forecast a low single digit growth in Silknet’s revenue in 2021 in line with gradual rebound in economic activity and tourism. GEL weakness remains to be the main risk factor for Silknet as significant portion of liabilities are unhedged (74%). Due to GEL’s 14% depreciation in 2020, net Debt-to-EBITDA jumped to 2.99x in 2020 from 2.75x by end-2019. In December 2020, Fitch downgraded Silknet’s rating to ‘B’ on the back of increased net leverage.

US treasury yields remained elevated throughout March 2021 (at 1.73% by 30 March 2021), despite insurance from the FED to maintain near zero interests rates until at least 2024. In Europe, in order to limit the negative effects of increasing interest rates in US, the ECB increased the weekly pace of its emergency bond-buying program from EUR 14bn to EUR 21.1bn in the second half of March. 

Portfolio flows to Emerging Markets (EMs) in March turned negative, with c. US$ 4.8bn exiting EM markets up to March 26 according to Institute of International Finance. Notably, this level is the largest outflow from EMs since September 2020, likely result of rising interest rates on US treasuries and associated sale of EM assets by investors. Growing COVID-19 cases and turmoil in Turkey also added pressure to the investor sentiments.  Overall portfolio flows to EMs stood at US$ 10.1bn, of which US$ 6.2bn went to debt instruments, while the rest to equities (mostly to China).

March 2021 saw another shakeup in Turkey’s economic block. Over 20-21 March weekend, Turkey’s Erdogan fired the central bank governor - Naci Agbal - who has been in the job for just four months. Since his appointment in November 2020, he raised interest rates in Turkey by a total of 8.75% to 19% by 19 March, 2021 (last hike happened on 19 March meeting, raising the key rate by 200bps). Sahap Kavcioglu, an academic and newspaper columnist became the new central bank governor, who shares Erdogan’s view of low-interest rate environment, against the mainstream economic theory. Lira depreciated by a record 14% on the news. Investors are now waiting for the first policy meeting under the new governor which is expected to take place in the first half of May. 

Apart from Turkey, several regional central banks tightened monetary stance in March 2021. On its 19 March meeting, Russian central bank raised interest rates by 25bps to 4.50% on the back of increased inflationary and geopolitical risks. In Georgia too, NBG increased its policy rate by 50bps to 8.5% citing increased inflation risks stemming from price increases in international commodity markets, higher production costs due to pandemic and persistence of depreciated exchange rate. 

On 12 April 2021, Georgian sovereign Eurobond will mature. Notably, the government is actively working with international investment banks to refinance the Eurobond by tapping international capital markets in the coming weeks. 

Yields on regional sovereign Eurobonds widened in March, 2021 in line with the hike in US treasury yields. TURKEY 26 was the worst performer of the month with the yield widening by169bps in March, on the back of deteriorated investor sentiments. BELARUS 27 also performed poorly, with the yield increasing by 119bps in the same period. Yields on other regional sovereign Eurobonds widened in the range of 10-30bps in March 2021. 

In March 2021, Georgia Capital priced a US$ 65mn tap issue to be consolidated and form a single series with the company’s existing US$ 300mn 6.125% senior notes due 2024. The notes were listed on the Irish Stock Exchange. The company intends to use approximately US$ 35mn of the proceeds to fund capital allocations to its portfolio companies and retain approximately US$ 30mn for general corporate purposes. Yield on GEOCAP 24 widened in March 2021 by 42.5bps to 5.65%.

Georgian corporate Eurobonds traded mixed in March 2021. Yields on Georgian banks narrowed, down by 25-26bps for BoG 23 and TBCG 24. Notably, on 31 March 2021 Fitch Ratings revised its outlook from ‘Negative’ to ‘Stable’ on three Georgian banks – Bank of Georgia, TBC Bank and Libery Bank – maintaining long-term credit ratings unchanged. Yield on CGEOLN 25 (GGU) declined by 17.1bps in March, trading at 6.5% YTM by 31 March, 2021. The downward trend of SILKNET 24’s YTM reversed in March 2021, with the yield widening by 22bps to 7.4%. Yield on GEOCAP 24 widened in March 2021 by 42.5bps to 5.65%.

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