April 27, 2015

This week in focus: Ukraine economy: searching for bottom

Ukraines industrial production dropped 21.1% y/y last month, Ukrstat said last week. As industrial output shrunk by 21.4% y/y in Jan-Mar 2015, we believe real GDP drop deepened to 15-15.5% y/y in 1Q 2015 as slump in retail sales accelerated and the agricultural sector showed its first negative reading since at least 2008. For the time being, we retain our forecast of a 7.5% GDP drop this year. Risks of a downside revision are nevertheless substantial, stemming primarily from a potential drag on the debt operation story or geopolitical factors.

Currency market: Current account nearly zero in Mar, expected to balance this year

USD/UAH has fluctuated around 23.0 through the past week, moved by the regular fluctuations in supply and demand. Current account was nearly balanced in Mar 2015 and the deficit of goods moderated to just USD 195mn as imports contracted faster than exports. The data is line with our expectations, as we believe the current account will balance this year (mostly due to a sharp drop in non-energy imports, spurred by contraction in real wages and retail demand). Balance of payments was still negative (-USD 305mn), as net lending to the private sector remains the major source of weakness. Going forward, we expect the interbank market to be largely anemic through the next two weeks. Ukraine heads to long May holidays, starting this Friday and finishing on Tuesday, May 12. Trades will therefore be rather inactive and movements of the USD/UAH will therefore be quite limited.

Money market: Good liquidity on bond redemption and budget payments

NBU said it had decided to retain the base policy rate at 30%. Commenting its decision, the policymakers noted that the March's indicators point to heightened risks of inflation rising above projections by end-2015. Going forward, we believe the policy rate will be left unchanged through the rest of the year and expect the rate could be lowered no earlier than by end 1Q 2016 (when the annual inflation will slow down to below 20%, according to our expectations). Aggregate banking liquidity has finally crossed the UAH 50bn threshold and hovered at UAH 50-52bn since Tuesday. The rise in liquidity took place against the backdrop of aggregate UAH 6.1bn of OVDP payouts last week (UAH 1.5bn Wednesday and UAH 4.6bn Friday) and increased budget payments by MinFin. Interest rates have not responded though, having stayed virtually flat. The limited reaction of interest rates to the record high liquidity is due to high NBU deposit rates (26-27% for tenors 6 to 30 days), in our view, effectively acting as a floor for the money market rates.

Local debt market: Dull

Real market yields (bids) on new VATs are around 27% and the same on old VATs are around 24%. Bid yields on notes maturing is summer 2016 are around 26.5% and notes due within the nearest 6 months are effectively absent in the market. Secondary market yields will likely be stable in the nearest future. MinFin may still enter the primary market, seeking a re-placement of old 2Y and military notes. Upcoming holidays will also have their say as market activity is expected to be very low during the next 2 weeks. Moreover, attractive yields on the NBU deposit certificates make them a more appealing investment than government notes (which implies the government would have to raise the primary yields accordingly to stimulate demand for its debt securities). In the FX segment, yields have remained roughly the same. Bid yields on the notes maturing in May, Jun and Jul this year are close to 1%, 5% and 7%, respectively. Underlying USD/UAH is around 23.5.

Global markets: Ukreximbank holders agree to 3M extension

Ukreximbank has today announced the bondholders approved a 3M extension of its USD 750mn Eurobonds due today. The bank also said it now intends to seek implementation of the reprofiling of the notes on the terms set out in the its notice issued one week ago, looking to reach an agreement by Jul 27, 2015. The price of the Ukreximbank Eurobonds has today averaged at 75.5% (Bloomberg data). Ukraine's MinFin is set to issue a USD 1bn Eurobond, as the agreement on US government loan guarantees is taking effect shortly and the guarantee provision will be effective within 30 days. Meanwhile, the outstanding issues of Ukraine government advanced by 2.5-3.5% last week, as investors were also spirited by the attractive Ukreximbank offer. DTEK announced results of the restructuring offer on its Eurobonds due 2015. Holders representing 91.14% of the outstanding principal amount of the issue (USD 200mn) have supported the proposal and the company said it is going to proceed with a new USD 160mn issue.

For more information27.04.2015.pdf