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Tbilisi Real Estate Market Watch - October 2020

30 Oct, 2020

Tbilisi real estate market drastically improved in September 2020 along with strengthening economic recovery. Key takeaways from the report include
  • Apartment sales were up in September (+14.4% y/y) after sales contracting in July (-14.9% y/y) and August (-16.3% y/y). Suburban districts dominated sales in 3Q20 as mortgage subsidy scheme supported transactions in budget/economy segment. As a result, the 4 suburban areas accounted for 56.1% of total residential sales in 3Q20 vs 52.0% in 3Q19.
  • New apartment prices were down in July (-8.6% y/y) and price reduction slowed in August (-7.6% y/y) and September (-5.9% y/y). However, this reduction was most likely driven by dominance of economy apartments in total transaction mix rather than market price correction. This means that the government’s 4% mortgage interest rate subsidy program supported real estate prices in 3Q20. 
  • We expect apartment sales to moderate in 4Q20, from September 2020 highs, as rising COVID cases and GEL depreciation may weigh on house buying decision.
Please see the full note here, which brings together real estate sale and price analytics for 3Q20, Covid-19 impacts and other statistical information available in the real estate market.

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Georgian Railway - 1H20 update

15 Oct, 2020

Refinancing risks mount for the upcoming bond maturity

Although COVID-19 related disruptions haven’t significantly affected Georgian Railway’s largest revenue category - freight transportation – other segments have come under significant pressure during the first half of 2020, particularly in 2Q20. After growing 7.4% y/y in 1Q20, GR’s revenue dropped by 15.2% y/y in 2Q20. Revenue from passenger traffic, freight handling and freight car rental, which together accounted for 25% of 2019 revenue, almost halved in 2Q20. In contrast, freight transportation and logistics service segments turned out to be more resilient revenue streams for the company. GR generated US$ 37.0mn in adjusted EBITDA in 1H20, up 3.0% y/y. Weaker GEL has pushed up company’s profitability margins as most of the revenue is USD denominated, while most of the operating expenses are incurred in GEL. GR is facing Eurobond maturity in 2022 and considering poor financial position of the company, securing financing at favorable terms might become difficult.                          

Despite the ongoing disruptions to global supply chains due to COVID-19 pandemic, transportation volumes going through Georgia have posted positive trends in 2020. Road transportation, which accounts for c. 70% of total freight going through Georgia, has increased marginally, up 1.1% to 19.1mn tons in 8M20, while freight transported by railway posted a strong 4.6% y/y growth in the same period.  

Georgian Railway generated US$ 80.8mn in revenue in 1H20, which is 5.1% lower compared to the same period last year. Strong growth in revenue in 1Q20 (+7.4% y/y to US$ 42.0mn), mostly helped by robust performance in the first two months of the year, was not enough to offset the sharp decline in GR’s 2Q20 revenue, which was down 15.2% y/y to US$ 39.0mn. Importantly, freight transportation, the largest revenue category, was down by a marginal 1.6% y/y to US$ 53.2mn in 1H20 as transportation volumes remained strong (discussed below).

Passenger traffic was the hardest hit segment, down 59.4% y/y to US$ 1.7mn in 1H20. Notably, most of the decline occurred during 2Q20, as passenger transportation was stopped by government during March-June 2020 due to COVID-19 (revenue plummeted to below US$ 0.2mn in 2Q20 vs. US$ 2.4mn in 2Q19).

Freight handing, which is the second largest revenue category for the company, was up 4.5%% y/y to US$ 11.6mn in 1H20, however the growth was entirely stemming from strong performance in the first quarter, when revenue more than doubled (to US$ 6.2mn). Freight handling revenue dropped 31.5% y/y in 2Q20. Freight car rental revenue category also experienced sharp decline in 2Q20 (- 63.2% y/y). On a positive note, logistics service revenue increased in both quarters of the year, with the revenue up 12.2% y/y to US$ 9.5mn in 1H20. 

Weak GEL contributed to the improvement of the company’s profitability margins. GR generated US$ 37.0mn in adjusted EBITDA in 1H20, up 3.0% y/y. As the company generates most of its revenue in USD, while most of the operating expenses are GEL denominated (GR’s operating expenses were down 10.5% y/y in 1H20 in USD terms and up 0.5% y/y in GEL terms) the company’s profitability margins improved in 1H20. Adjusted EBITDA margin came in at 45.8% in 1H20, compared to 42.2% in 1H19.

Please see the full report for detailed coverage of Georgian Railway’s 1H20 performance.

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Regional Fixed Income Market Watch September 2020

8 Oct, 2020

• September turned out to be a bumpy month for regional fixed income securities.  Capital flows to emerging markets turned negative in September after 5 months of positive flows.  According to  Institute of International Finance emerging markets debt posted an inflow of US$12.9bn, while US$ 10.8bn worth of equities were sold during September, of which US$ 4bn left Chinese stocks. The reversal of capital flows, creates difficulties for emerging countries, making domestic funding conditions tougher and causing depreciation of local currencies. TRY turned out to be the worst performer among the regional currencies, depreciating by 5.1% during September. Notably, to tackle lira’s fall, on 24 September Turkey’s central bank surprised the markets by raising the key rate by 2%, against Recep Tayyip Erdogan’s push for lower rates.
• The situation in the Caucasus region escalated in the end of September, when clashes in Nagorno-Karabakh re-erupted, leading to declaration of war between Armenia and Azerbaijan. Military conflict was reflected in the respective bond performance with the yields for sovereign Eurobonds of both countries widening in the last week of September. Not surprisingly ARMENIA 25 (4.8% YTM; 109.3 price) and AZERB 24 (3.2% YTM; 105.2 price) were the worst performers of the month, with the yields jumping by 132bps and 107bps, respectively. From other regional Eurobonds Russia (1.4% YTM; 110.0 price) performed relatively better with the yield widening only by 15bps in September, followed by KAZAKH 24 (1.5% YTM; 109.2 price) and UZBEK 24 (3.1% YTM; 105.4 price) increasing by 21bps and 24bps, respectively. Yields on TURKEY 21, BELARUS 23, GEORGIA 21 and UKRAINE 21 increased by 55bps, 58bps, 66bps and 100bps, respectively. 
• From regional central banks Uzbekistan and Armenia reduced policy rates by 100bps to 14.00% and 25bps to 4.25%, respectively. While, central bank of Turkey made a surprise hike of 200bps to 10.25% aiming for stopping lira’s freefall. Other regional central banks kept policy rates unchanged in September.  
• Most of the regional currencies depreciated against dollar in the range of 0.3%-5.1% during September, with BYN of Belarus being exception. BNY appreciated by 1.9%, regaining its lost value during previous month’s political turmoil. 
• In its first draft of 2021 Budget, Government of Georgia announced a plan to repay US$ 500mn Sovereign Eurobonds in 2021, if there are no complications with the virus and economic parameters are in line with projections (read more in our report). Notably, Georgian Oil and Gas Corporation, a quasi-government entity which was facing US$ 250mn Eurobond maturity in 1Q21, announced about the signing a loan facility from EBRD, which will be used to refinance the Eurobond. 
• Among Georgian placements, GRAIL 22 (4.7% YTM) turned out to be the best performer of the month, with the yield down by 16bps, while yield on GOGC 21 remained flat. Among Georgian banks BOG 23 (4.3% YTM) performed well, with the yield down by 19bps, while yield on TBC 24 (5.2% YTM) was up by 36bps. The price of CGEOLN 25 and SILKNET 24 have remained mostly flat during September.
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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First Draft of 2021 Budget - a Plan to Repay a Sovereign Eurobond

6 Oct, 2020

The government submitted the first draft of its 2021 budget to parliament, together with the medium-term forecasts for 2021-24. It must pass three parliamentary hearings before it becomes law, and changes to the first draft estimates are in practice very frequent. Given parliamentary elections on October 31, 2020, the final draft will be discussed by a new parliament. 

The MOF (Ministry of Finance) forecasts growth to rebound to 5.0% in 2021. The draft budget sets the GDP deflator at 4.0% in 2021.

Capital expenditures are set to increase by 22.8% y/y to 8.3% of GDP in 2021, supporting growth. Current expenditures are set to decrease by 5.2% y/y to 22.5% of GDP in 2021 from 25.9% in 2020, however is subject to revisions in final draft based on MOF.

Fiscal deficit is set at 5.1% of GDP, however the need for further anti-crisis fiscal stimulus in 2021 expected to widen the fiscal deficit to 5.5% of GDP versus 5.1% in the initial budget document, in our view. 

Explanatory note to the budget states that the final parameters will be more accurate after incorporating discussions with the IMF in October, updated world economic forecasts by the IMF, and taking into account the need for additional support to the economy. 

We believe that outcome of the elections will not impact fiscal consolidation path considering Georgia’s track record, fiscal rule and ongoing IMF program. Government plans to achieve 3.0% of GDP fiscal deficit from 2023, as law allows the deficit to exceed the cap - 3% of GDP - for only 3 years. 

Government plans to repay US$ 500mn Eurobonds and also reduce net domestic debt by GEL 855mn y/y in 2021. As a result, public debt is projected to decrease from 57.9% of GDP in 2020 to 55.9% in 2021.

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