WOOD Flash – Georgia macro: insights on a Ukraine deal spillover to Georgia

Following the acceleration of a potential peace deal in Ukraine, Georgian assets have been among the top performers over the past month, reflecting the market’s optimism over the possible ceasefire or deal between Russia and the United States. From 21 January until today (18 February), Bank of Georgia (BUY, PT GBP 52.3) has gained 17%, while TBC Bank (BUY, PT GBP 38.0) has surged by 32%, outperforming the broader EM banks significantly and even the Polish WIG banks. While the market appears to be pricing in a default positive spillover effect from a potential peace deal. In our view, an upside on Georgia of a resolution of the conflict in Ukraine is possible, but far more nuanced, with a few downside risks that the market may be underestimating. These include: i) potential indirect negative economic effects from easing of Russian sanctions; ii) the ongoing uncertainty regarding the relationship between Georgian Dream (GD) and the Trump administration; and iii) the deteriorating FDI outlook, due to Georgia’s weakened ties with the EU. On the last two points, we believe that, with peace in Ukraine, GD might have a higher chance of normalising its relationship with the US and the EU (although, so far, we have not seen any progress on this). In this flash note, we delve a little more into these three points, explaining why, in our view, the market’s response following Trump’s inauguration may have been a little hasty.