December 14, 2015

This week in focus: Macrofinancial stability is the main policy theme going forward

With insolvent banks unaccounted, FX deposits were trimmed by USD 61mn, while UAH deposits grew by UAH 3.0bn. Although worse than in Oct, the figures are still rather favorable, especially given the recent swings on the FX market and, presumably, more downbeat expectations across the population regarding the UAH exchange rate for the next year. High interest rates are likely the principal driver of the local currency deposits, which look especially tempting against the backdrop of the relatively low consumer price growth since Jun 2015. As devaluation expectations remain elevated, we expect the NBU to keep its interest rates high in the medium run (with respective consequences for the banks lending rates). By keeping its depo rates high, the regulator will promote further growth of the local currency deposits of individuals, and will therefore prevent these funds from spilling over into the cash FX market. Against this background, we expect the local currency deposits to grow further, potentially alleviating excessive pressure on the UAH.

Currency market: 23/24 seen to be NBUs comfort zone, for now

The week was rather uneven as the USD/UAH strode from 22.9/23.0 on Tuesday to 23.8/23.9 on Friday. 1H of the week was characterized by increased FX offer and the NBU stepped up with a series of buy auctions. As the exchange rate headed back to 24, the regulator stepped aside from the market. The NBUs overall stance towards its FX auctions brings us to a conclusion that the regulator feels comfortable with the interbank USD/UAH hovering between 23 and 24. In the short run, we expect the USD/UAH to stay generally stable, hovering close to the upper bound of the 23/24 corridor. The situation may still change if continuation of the IMF funding gets more uncertain, on the back of an indeed significant delay with the 2016 budget. Our central scenario however provides that the IMF-compliant budget will be adopted by the end of the year, which would thus unlock Ukraines further funding by the IMF. As a side note, according to the draft budget 2016, the USD/UAH is projected at 24.1 (year average) and 24.4 (end of year).  We believe those figures to be overly optimistic and, in the present context, retain our view of the USD/UAH at around 30 by end 2016.

Money market: Banking liquidity stays abundant amid shallow NBU back-up

Having dipped to below UAH 90bn in the 1H of the week, banking liquidity recovered to 90bn+ since Wednesday. As cash injections from remain virtually zero, OVDP redemptions, interest payments on the central banks CDs and (presumably) DGF funds appear to be the major sources of the banking liquidity. On top of that, UAH deposits of households continued to grow in Nov, and inflows have likely persisted this month. Money market rates stay flat. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%.  NBU will hold its second OVDP auction on Dec 16. As previously, the regulator will offer VAT notes to the market. 

Global markets: Fed interest rate hike expected this Wednesday

MinFin reported progress in the talks between Ukrzaliznytsia and the creditor committee, while holders of the USD 300mn Eurobonds of the City of Kiev upheld their restructuring. The fate of another Eurobond issue of Kiev (USD 250, due Nov 2015) is still not totally clear, as the issuer has extended the exchange expiration date to Dec 16. IMF changed a rule that would have blocked its financial aid program to Ukraine in the event the country defaulted on debt owed to Russia. Brent dipped below US 40, trading at 7Y lows, on oversupply concerns. Meanwhile, according to a Wall Street Journal report, US legislators may lift the 40Y ban on exports of crude oil this week. This Wednesday Fed will announce results of its much expected policy meeting. Bloomberg survey shows that markets expect the interest rate band to be lifted to 0.25/0.50% (from the current 0.00-0.25%), which would be the first interest rate hike since May 2004.  Yields on Ukraine sovereign Eurobonds resumed their growth since Friday, which could be a combination of EM fund outflows ahead of the expected US interest rate hikes and Ukraine domestic volatility.

For more informationUkrSibbank_141215.pdf