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Georgian Economy - The Recovery Continues

17 Sept, 2020

The economic recovery continues to strengthen in Georgia despite the halt in international tourism. Decent fiscal stimulus is supporting domestic demand, along with strong growth in remittances since June 2020 and continuation of bank lending. Notably, VAT revenue growth turned positive in August 2020 for the first time since March this year, hinting at better-than-expected recovery dynamics. We do not assume the re-imposition of strict lockdown measures in our base case scenario, though the risk has increased in recent days amid rising COVID-19 cases. We maintain our growth forecast (-5.1% in 2020), but note that our GEL forecast (GEL3.1/US$ in 2H20) is skewed to the weaker side. This, however, supports further adjustment in imports and a current account deficit of below 9% of GDP in 2020, in our view. The NBG maintained its key rate at 8.0% on September 16, despite the pullback in inflation, as the regulator remains cautious of GEL weakness and a possible deterioration in sentiment due to the recent increase in COVID-19 cases and approaching elections.

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Regional Fixed Income Market Watch August 2020

3 Sept, 2020

• After real yields on US Government securities being negative for most of the year, real yields on some of the corporate bonds also moved to negative territory. Unprecedented central bank support for the corporate bond market has pushed corporate bond prices up, while dragging yields down. Real yields on some of the high-quality, short-term bonds have slipped below zero, which means that some investors are willing to accept a loss for buying corporate bonds, after adjusting for inflation. This is not expected to change materially in the near future as interest rates projected to remain low, while inflation expectations are building up. Negative real yields on investment grade corporate bonds forces investors to look for alternative investment opportunities. After shifting from Government securities to investment grade corporate bonds, ‘Yield-starved’ investors now will turn to higher return "junk-bond markets".  
• All regional central banks kept policy rates unchanged in August, with the exception of Georgia, where policy rate was cut by 25bps to 8.00%. 
• Most of the regional currencies remained flat during August, with BYN of Belarus and TRY of Turkey being exceptions. BNY depreciated by 8.7% in August due to continued political turmoil in the country, while TRY depreciated by 5.3% in the same period. 
• Regional Eurobonds traded mixed in August. Not surprisingly BELARUS 23 (7.5% YTM; 98.7 price) was the worst performer of the month. The yield on BELARUS 23 reached 9.7% by 17 August, before retreating to 7.5% by end of month, however this level still remains significantly higher compared to peer countries, explained by political instability. From other regional Eurobonds Turkey (3.8% YTM; 101.0 price) performed strongly with the yield declining by 100bps in August, followed by GEORGIA 21 (2.2% YTM; 102.8 price) which narrowed by 91bps in the same period. UKRAINE 21 also performed well, with the yield down by 74bps, while yield on ARMENIA 25, AZERB 24 and Kazakh 24 declined by 32bps, 29bps and 17bps, respectively.  Yields on other Eurobonds remained relatively flat in August. 
• Among Georgian placements, GRAIL 22 (4.9% YTM; 105.1 price) turned out to be the best performer of the month, with the yield down by 124bps, while GOGC 21 (4.1% YTM; 101.7 price) another quasi-government entity narrowed by 75bps in the same period. Among Georgian banks BOG 23 (4.5% YTM; 104.0 price) performed strongly, with the yield down by 119bps, while yields on TBC 24 (4.8% YTM; 103.3 price) and GEOCAP 24 (7.6% YTM; 95.5 price) were down by 54bps and 56bps, respectively. 
• The price of the newly issued GGU Eurobond - CGEOLN 25 – has remained stable, trading at 101.1% of par translating into a yield of 7.47% as of 31 August, 2020. Yield on SILKNET 24 (9.2% YTM; 105.5 price) remained mostly flat during August. 
• Notably, on 31 August Georgian Leasing Company successfully placed a 2-year, 7.5%, US$ 10mn bond on local market. 

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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Georgia's Energy Sector - Electricity Market Watch | 1H20

13 Aug, 2020

Electricity consumption was down by 4.5% y/y to 6.1TWh in 1H20, caused by lockdown and related decreased economic activity due to Covid-19 pandemic. The decrease was most significant in 2Q20 (-10.7% y/y), as lockdown started in mid-March. Ministry of economy and sustainable development forecasts 5.8% y/y decrease in annual consumption of 2020, according to the updated (as of Jul-20) annual balance of electricity. Notably, Abkhazian region’s electricity consumption increased in both quarters by 8.0% y/y and 27.8%y/y respectively, while for the rest of Georgia drop in consumption was 0.7% y/y in 1Q20 and deepened to 16.7% in 2Q20. In 1H20, the Abkhazian region’s consumption was up by 15.2% y/y, while consumption by rest of Georgia was down by 8.8% y/y.

The energy market will undergo significant changes from July 2021. The GNERC adopted the day-ahead and intraday market rules, as well as the balancing and ancillary services market rules, and appointed the relevant market operators. The day-ahead market will start operating and an imbalance settlement mechanism will be introduced in Jul-21. The full launch of the intraday market and ancillary services market is scheduled for 2022. Relevant platforms are in the test mode, and trainings of market participants will start from Sep-20. 

Market reforms follow the planned timeline. In 2Q20, following regulatory changes were made: Parliament of Georgia adopted laws on energy efficiency and energy efficiency of buildings; Government of Georgia adopted national renewable energy action plan for 2020 (NREAP) and national energy efficiency action plan for 2030 (NEEAP); Government also adopted new support mechanism for hydropower plants and made some changes into the newly adopted energy law; GNERC adopted rules for: day-ahead and intraday markets, balancing and ancillary services markets, licensing and unbundling of distribution system operator. 

A new incentive mechanism has been introduced for hydropower plants with a capacity of more than 5 MW. During the first 10 years of operation, for each September-April period, ESCO will assist HPPs in market risk insurance. If the market price for any hour falls below USc 5.5/kWh, ESCO will cover the difference between the market price and USc 5.5/kWh. Maximum limit of this assistance/insurance will be USc 1.5/kWh. Before 2017, the Guaranteed Power Purchase Agreement (PPA) mechanism was used to encourage renewable energy investments. The instrument was terminated in 2017 because it was considered to pose high fiscal risk to the state and to be the possible disruption to competitive markets. The new mechanism limits fiscal risk of the state to USc 1.5/kWh, while effectively guaranteeing the investor income of USc 5.5/kWh, as market prices are not expected to fall below USc 4/kWh in the long run.

The sale of more than 5% of the shares of the licensed companies must be agreed with GNERC. According to the Jun-20 amendment to the new Energy law, distribution and transmission system operators must notify GENRC in advance regarding the terms of sale (or change in ownership) of over 5% of company’s shares. The Georgian National Energy and Water Supply Regulatory Commission is authorized to cancel the transaction or request change of terms, if it considers that the terms of the transaction impair the quality of service or affect the tariff of the system operator.

The Partnership Fund handed over ESCO and GSE to the state, while its shareholding in JSC Telasi (24.5% of shares) was put up for auction. The State owned Partnership Fund has transferred two subsidiary energy enterprises, the Electricity System Commercial Operator (ESCO) and distribution and transmission licensee Georgian State Electrosystem (GSE), to state ownership. The transfer did not lead to a change in the management of the companies, as the companies have already been monitored by the Ministry of Economy and Sustainable Development. Moreover, as part of the reform, the Partnership Fund also plans to sell a 24.5% share in JSC Telasi, for which a public auction has been announced. The starting price at the auction is US$ 10.5mn and the final sale price will be announced in Sep-20. The remaining 75% of Telasi shares are owned by Inter-RAO.

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Regional Fixed Income Market Watch July 2020

6 Aug, 2020

• As expected Fed kept its policy rate unchanged and maintained dovish tone at its July 28 meeting. Fed chair, Jerome Powell underlined the importance of “course of the virus” for US economic outlook and said that “the pace of the recovery looks like it has slowed” as COVID-19 cases grew in June, based on high-frequency data monitored by the Fed. 2Q20 economic slump turned out to be the worst in American history. US GDP dropped at an annualized rate of 32.9% in 2Q20, in line with the Bloomberg consensus of roughly 35%. Eurozone economy also shrank at a record 12.1% in 2Q20, with Germany’s GDP contracting by 10.1% in 2Q20, the lowest rate in 50 years.  
• Rush for safe-haven assets resumes as COVID-19 cases pick-up and numbers for US and EU economy are worse than expected. 10 year US treasury real yields bottomed at -1.0% signalling investors’ readiness to pay for safer assets. The rise of bond prices and falling yields also indicate that markets expect Fed to keep low-interest rates for a while.
• From regional central banks Russia lowered key rate by 25bps to 4.25%, Azerbaijan by 25bps to 6.75%, Kazakhstan by 50bps to 9.00%, Belarus by 25bps to 7.75% and Georgia by 25bps to 8.00%, while other monetary authorities kept policy rates unchanged. As of 5 August 2020, monetary policy rate is at 4.50% in Armenia (-50bps), at 6.00% in Ukraine (-200bps) and at 8.25% in Turkey (-50bps).
• All regional currencies depreciated against dollar in the range of 0.6%-4.4% over July, with GEL performing relatively well (0.6% depreciation) while RUB, KZT and UAH  depreciated by 4.4%, 3.9% and 3.7%, respectively. TRY weakened by 1.7%, BYN by 1.1% and AMD by 1.0%.
• Regional Eurobonds traded mixed in July. Turkish Eurobond (4.8% YTM; 100.5 price) was the worst performer, with the yield jumping by 175bps reaching 4.8% by 31 July 2020. Other regional Eurobonds performed relatively better in July, with Georgia’s yield narrowing the most, down 67bps to 3.1% (3.1% YTM; 102.5 price).  Azerbaijan (2.4% YTM; 108.12 price) and Belarus (6.3% YTM, 101.3 price) also performed strongly, with yields declining by 45bps and 40bps, respectively.  Other Eurobonds also strengthened, with yields on UZBEKISTAN 24 (2.7% YTM; 106.8 price), ARMENIA 25 (3.8% YTM; 114.1 price) and KAZAKHSTAN 24 (1.4% YTM; 109.9 price) down by 38bps, 35bps and 20bps, respectively.  Notably UKRAINE 21 (4.5% YTM; 103.4 price) declined by 11bps in July and is trading at a lower yield compared to TURKEY 21 for the first time. Yield on Russian Eurobond remained mostly flat in the reporting period.  
• Among Georgian placements, GOGC 21 was the top performer with the yield dropping by 99.6bps to 4.8% in July while GRAIL 22 decreased by 59bps in the same period. Yields on other corporate Eurobonds also lowered in the range of 50-60bps in July.
• Georgian Global Utilities, water utility and renewable energy business under Georgia Capital, successfully placed first ever green bond from Georgia.
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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