December 07, 2015

This week in focus: Current account again in red

Ukraines current account slid into deficit last month (-USD 322mn vs. USD 135mn in Sep 2015). This is the first monthly deficit since May 2015. As we expected, increased gas imports stood behind the resumed shortfall. Although seemingly stabilizing in dollar terms, exports continue to be weighed by low commodity prices. Going forward, we expect the current account balance to stay negative this month as Ukraines gas imports remained elevated. We also maintain our current account forecast for the current year at -USD 1.2bn (the deficit being solely due to the gas imports). In 2016, the current account deficit is expected to stay largely the same as 1) exports will be anemic and 2) marginally higher non-energy imports will be set off by lower gas prices. Moderate upside potential stems from the sphere of services, though.

Currency market: Back to normal

As FX offer spiked Wednesday-Thursday, the FX market saw a short spell of the UAH strengthening. By the end of the week, FX offer started to deplete and by end Friday the USD has recovered losses, having climbed to 23.75/23.95. Going forward, we expect a gradual decline of the UAH (in the medium run). NBU reserves were reported at USD 13.148mn as of end Nov 2015. The end-Nov volume is generally enough to cover Ukraines FX needs in the short run (especially as Naftogaz has shifted to market FX purchases, as we understand), but are are obviously too low to expect any material interventions to shore up the UAH. That being said, the NBUs decision to extend its capital / currency controls (announced on late Friday) has been perfectly expected. Going forward, we expect the major controls to be retained at least until mid 2016. On the positive note, surplus of private capital flows went up to USD 308mn last month, suggesting first tentative signs of improved views on Ukraine.

Money market: New tools from central bank

Banking liquidity stick to around UAH 90bn, and the correspondent accounts are close to UAH 25bn. Money market rates stay flat. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%.  NBU extends its policy tools. The central bank announced its intention to launch OVDP auctions. As the regulator will sell OVDP from its portfolio, bids will be satisfied starting from the highest price offered. On top of that, the NBU has allowed the banks to conduct repo transactions on the secondary market with its certificate deposits. Both steps are supposed to strengthen the link (transmission) between the NBUs policy rate decisions and the market interest rates.

Global markets: As ECB falls short of expectations, eyes turn to Fed

The much expected ECB decisions turned softer than anticipated. Central bank deposit rate was slashed only 10 basis points and the volume of asset purchases was not scaled up. As a result, the single currency went up sharply, having gone above USD 1.09 per EUR on Thursday. Later on, the pair stabilized at around 1.085. In the US, Oct jobs data beat expectations. As the next Fed policy decision will be announced on Dec 16, pressure on the policymakers to start normalizing Feds interest rates is mounting. Brent went down to around USD 43 per barrel, following OPECs decision to maintain output at its current levels. Eager to defend its market share, the Saudis indicated the cut will not be there unless countries outside the group cooperate. Following a nearly one week rise, Ukraine Eurobond yields have apparently stabilized at new levels (9.1-9.2%).

For more information: UkrSibbank_071215.pdf