August 10, 2015

This week in focus: Disinflation, please!

Ukraine’s consumer prices dropped 1% in Jul vs. Jun, having posted the first month-to-month negative reading since Aug 2013 and having continued to decelerate since the Apr 2015 spike. Against this backdrop, annual CPI growth continued to slow as well, having moderated to 55.3% last month. The seasonally lower food prices were the main disinflation driver last month, while further reason behind the price compression included the sharply decelerated utility price growth and low domestic demand. On the supply side, prices remained constrained by stable FX market. As the disinflation trend falls in line with our expectations, we retain our end-2015 CPI forecast at 46.6% y/y.

Currency market: IMF signals weaker UAH by end 2015

Update of Ukraine-IMF memo indicates the UAH weakening to 23.5 per USD by the end of 2015, given “a slow depreciation” expected in 3-4Q 2015, “reflecting seasonal factors and the programmed reserve accumulation”. While the view is in line with our expectations, we would however expect the UAH to dip somewhat deeper than the stated 23.5 per USD, given a number of serious headwind ahead. Moreover, given that the IMF memo provides for the year average USD/UAH at 22, this implies that, mathematically, the major weakening of the UAH should take place no earlier than in 4Q 2015. To this end, the reader may recall that Ukraine will face local elections at the end of Oct 2015. Speaking about the present administrative restrictions on Ukraine’s FX market, the IMF says a dedicated, conditions-based plan for the gradual removal of the present administrative restrictions has been developed.  To this end, authorities will begin implementing this plan “in a gradual and cautious manner” once financial conditions have stabilized more firmly and the following a number of prerequisites are met.

Money market: Monetary easing may be played down by expected UAH weakening  

In its updated cooperation agenda with Ukraine, IMF says Ukraine’s monetary policy has been in line with the program, adding also that the central bank’s “policy stance could be eased later in the year to support economic activity”, if “inflation expectations remain well anchored, inflation subsides in line with program projections, and the FX market stability continues”. While Ukraine has indeed entered a pronounced disinflation path, constraints for a future monetary easing stem from a potential weakening of the UAH exchange rate later this year. To this end, huge UAH liquidity overhang poses the major source of risks, in our view. Against this backdrop, IMF has noted that a monetary easing should proceed “in parallel, and in a coordinated manner, with removing administrative measures on the FX market” – in line with our views that we expressed in our previous Weekly report. Still, as a weaker UAH may reverse the currently observed disinflation trend, assumed monetary easing may turn to be very limited this year, in our view.   

Local debt market: Resumed state budget deficit gives hope for OVDP market revival

1H 2015 state budget balance posted a UAH 2.1bn deficit. As the balance has finally turned negative (in line with our expectations), the deficit suggests the government may have to return to the primary debt market through the next couple of months. To this end, lower NBU depo rates could be a good boost for new OVDP sales by the government later this year. Offer of FX OVDP will likely grow thinner in future, as MinFin only undertakes to “seek to roll over the government’s domestic FX debt liabilities”, doing so “at least at the rate assumed under the program” (and said to be equal to 40% in 2016). Noteworthy, an updated Ukraine-IMF memo provides for no VAT bond placements this year. That said, VAT arrears accumulated in Jan-Jun 2015 are estimated at UAH 7bn – all of which are supposed to be cleared through regular budgetary refunds, as we understand from the document.

Global markets: Ukraine to hold a “final opportunity” meeting with creditors this week

Ukraine’s MinFin announced a meeting with the ad hoc creditors’ committee this Wednesday. The Ministry has already called this meeting “the final opportunity to reach a full agreement”, considering “the legal and timing constraints”. Moreover, according to the MinFin’s statement, a failure to reach an agreement next week “would force Ukraine to implement alternative options for financing its IMF-supported program”. While the statement is both strong and straightforward, we would still expect the talks to go on at least until Aug 24 (on which date a USD 60mn sovereign Eurobond coupon comes due and when a legal freeze of external bond payments may be actually implemented). Still, given the fact that the meeting will reportedly take place at the creditors' request, gives hope that an additional progress may be made already this week. Meanwhile, according to the latest IMF memo, “in case that an agreement with creditors is not reached within a reasonable period and a moratorium on debt service is imposed, arrears to private creditors will provide temporary program financing”. 

For more information: UkrSibbank_100815.pdf