August 17, 2015

This week in focus: Recent data provide no clear ground for a quick policy easing

NBU will have to face a difficult choice this autumn, clinched between the need to revive the economy through a softer monetary policy, on the one hand, and the task to defend the UAH from further depreciation, on the other. While double-digit GDP decline calls for a softer policy stance to support economic activity, local currency deposits of individuals resumed their fall and the drop of FX retail deposits accelerated last month, triggered by fears of a Ukraines default on its foreign debt liabilities. As banking deposits stay vulnerable and highly reflexive to external newsflow, prospects of such policy easing may become more distant, in our view.

Currency market: Black market USD flares again

USD/UAH trades have stayed within the 21/23 range during the past week. One could see no interventions from the NBU, although one day state-owned appeared to have stepped up on FX purchases as sellers overbalanced buyers. Black market has tended upwards having closed Friday at 23.05/23.25, by our estimates (vs. 22.8-22.9 levels seen in 1H of the week). Intensified fightings in the Eastern Ukraine could be the primary reason behind the rise of the black market, and the last chance talks between the government and creditors could also be a driver. Head of NBU Gontareva said Ukraine will seek to finish the current year with at least USD 15bn in its FX reserves. While the Ukraine-IMF updated agenda requires the FX reserves to grow to USD 18.3bn as of end 2015, Ms. Gontareva acknowledged that this figure may be too ambitious.  To remind, we expect the end-2015 reserves to land at USD 13.4bn, having stuck to this forecast since 1Q 2015.

Money market: Flat

Banking liquidity appears to have entrenched itself at above UAH 70bn area. As of yesterday morning aggregate balances were estimated at over UAH 73bn, of which nearly UAH 24bn was rest on the correspondent accounts and the remaining UAH 49bn in the NBU CDs. Money market rates were left unchanged. ON rate is 17/19%, indicative 1 week is around 18/20%, while indicative 1M is 20/23%. NBUs 1M and 3M depo rates have also been unchanged at 22% and 23%, respectively. Short-term NBU liquidity support remains virtually zero. As a separate note, Ukraine Deposit Guarantee Fund reported a 100% sale of the insolvent Ukrgazprombank to Primestar Energy FZE, a Dubai-based investment fund. This is the second such sale of an insolvent to a non-resident investor (recently, Astra Bank has been sold to Agro Holding Ltd, a Ukrainian subsidiary of the US-based NCH Capital investment fund).

Local debt market: Holiday season

Market activity has been very low these days, leaving one nothing to talk about. As holiday season will expire by the end of the month, trades will likely get more active since early Sep. Meanwhile, NBU continues to offer OVDP from its portfolio, with underlying yields kept unchanged (6M at 22.5%; 1Y at 20.5%; 3Y at 17%; 5Y at 15%; 10Y at 12%).

Global markets: Governments talks with creditors drag on, oil hits 6-month lows

Talks with creditors have continued Wednesday to Friday and were extended over the weekend. While the newsflow remains very thin, both parties are obviously at odds over the volume of the prospective haircuts.  The Greek government will likely have to face a confidence vote, as almost a third of the deputies from the ruling Syriza party abstained or voted against the country's new, EUR 86bn bailout deal clinched on Aug 11. Oil fell towards 6-year lows today, on data showing the economy of Japan contracted in 2Q (-1.6% y/y), another weekly jump in US oil rig additions and news that Oman produced a record 1mn barrels a day last month. Dollar got firmer after the Chinas central bank set the yuan slightly above its fixing rate on Friday, soothing fears that Beijing was intent on a bigger devaluation following a 3% cut last week. Looking to predict Feds further policy actions, investors will now wait for the US inflation data and minutes from the Fed's latest policy meeting this Wednesday.

For more information: UkrSibbank_170815.pdf