This week in focus: UAH looks weak despite healthy current account figures

According to preliminary data from the NBU, current account showed a USD 361mn surplus in Jun. Balance of goods reached USD 49mn, posting the first positive reading since at least Jan 2010. For the time being, we maintain our forecast of a zero current account this year, although admit that a slight downward revision may be needed based on late 3Q - early 4Q data. We also see the UAH to be rather weak, despite the overall healthy current account figures this year. We would therefore expect the UAH to notably go down vs. the USD, once the capital and currency controls are softened (which will still take place no sooner than following the Oct 2015 elections, in our view).

Currency market: Interbank USD/UAH shows muted reaction to announced IMF tranche

IMF has officially approved disbursement of the next tranche to Ukraine, totaling SDR 1.2bn or about USD 1.6bn. While the move was announced on Friday night, interbank USD/UAH closed at 21.5-22.0 yesterday, having moved up from 21.35/21.50 on end Friday and just an edge below levels seen one week ago (22.15/22.25). While the news had been largely expected by market participants, muted reaction from Ukraine’s interbank market may point to implicit UAH weakness, in our view. While FX needs of the Ukrainian government look fully supplied for the current year, getting approval of the next (third) IMF disbursement may, however, be more challenging, as Ukraine is nearing the date of the local elections at end Oct 2015. 

Money market: Prospective monetary easing calls for (drastically) lower NBU depo rates

Commenting its decision to approve the USD 1.6bn disbursement to Ukraine, IMF said that “as disinflation takes root, monetary policy can be carefully eased to support economic activity”. One day earlier this message was mirrored by the NBU Head saying that “should inflationary risks keep decreasing”, the NBU “will start easing its monetary policy in the nearest future”. As the banking liquidity hovers close to its all-time highs (UAH 65-70bn), banks prefer to park their free funds in the “safe-haven” central bank’s certificates of deposit, while volumes of lending to the real sector remain very low. We therefore believe that monetary easing would require a drastic cut of the central bank’s depo rates, which should be supplemented by a sensible softening of the present FX controls (bringing the USD/UAH closer to its fair levels and lowering the scope for shorting the UAH). Taking this into account, we would rather expect such (real) monetary easing to be kick-started no sooner than after the end of Oct this year (i.e. after completion of the local elections).

Local debt market: Record treasury account promises no UAH OVDP placements within coming months; bids for VAT notes down to 23%

Yields on OVDP offered by NBU from its portfolio have been kept unchanged (6M at 22.5%; 1Y at 20.5%; 3Y at 17%; 5Y at 15%; 10Y at 12%). Demand remains modest, however, and sales are limited to 1Y-6M notes. Secondary market saw no major changes last week, except for a notable drop in bid yields on the VAT bonds (25% to 23%). Offer of USD notes remains very scarce. It however remains unclear whether the regulator will enter with additional USD placements (which would come on top the maturing issues and thus widen the secondary market).  Balance of MinFin treasury account reached UAH 33.3bn, posting an all-time high. The data suggests that government’s budget performance stays strong, promising no open market UAH OVDP placements within the nearest couple of months, in our view. 

Global markets: MinFin approaches creditors with revised proposal, calls this week “decisive”

Today Ukraine MinFin said it had sent a revised proposal to the creditor group, while “top-level” talks will be continued on Thursday. The Ministry also said that “given the legal considerations around timely implementation of the proposal, this week will be decisive for the negotiations”. Ukraine's creditor group has offered a 5% haircut on the Ukrainian foreign debt (vs. 40% proposed by Ukraine this spring). The 5% debt relief appears to be too small, however, making us expect that the parties will finally reach a compromise figure at between 10% and 20%. Meanwhile, Ukraine sovereign Eurobonds have picked up 2-3% in price, reflecting positive moods inflicted by the USD 120mn coupon payment affected on Friday, Jul 24. Mid price of Ukraine-2015 rose to 62% (vs. 55.5% on Jul 23), according to Bloomberg (see Figure 8 on the next page). On top of that, holders of Oschadbank’s Eurobonds have officially agreed to restructuring of the bank’s notes due 2016 and 2018.

For more information: UkrSibbank_040815.pdf