February 02, 2016

This week in focus: Weaker budget revenues to spur government borrowings later this year

Ukraine's 2015 budget proceeds spiked by record 49.7%. Tax revenues alone were up by 46.1%, spurred by the 43% inflation in the first place. According to the 2016 budget law, revenues are planned to grow by 11%. Tax revenues are supposed to be the principal growth driver, expanding by 21%. By now, the forecast on revenues is fairly optimistic, in our view, as governments tax generation capacity will be hampered by a combination of weak economic recovery and lower inflation. Against this backdrop, we anticipate the government borrowings to get more active by mid 2016, when the shortfall of revenues will become more vivid.

Currency market: Low FX revenues dictate weaker UAH

Interbank USD soared, having closed Friday at 25.50/25.75. FX market has been very shallow these days, suggesting limited FX supply. Exporters have recently received substantial volumes of VAT reimbursement and seasonal effects may be also to blame (1Q is usually characterized by a physical dip of exports). Despite expectations, NBU has fended off the market. This may be due to an expected IMF decision on Ukraine, as the central bank may have tried to demonstrate its flexibility towards the UAH exchange rate and thus secure the Funds next disbursement. Yesterday NBU Head said Ukraine may send an updated memo to the IMF already this week, which implies the third (USD 1.7bn) disbursement could be received within the next 4 weeks or so. The upcoming Governments address to the Parliament (Feb 16), and a likely reshuffling of the Cabinet thereafter, may lead to further delays, however. Going forward, market volatility may stay high until the IMF disbursement is announced.

Money market: UAH OVDP placement gradually unwind

Last week MinFin made a number of new borrowings. Although yields proposed by the government are somewhat below those prevailing on the secondary market, all bids were likely market-based. While volumes are still low, the rise in demand for the government notes could be spurred by reduced interest rates, offered by the reasonably reliable banks for their corporate customers (mind the abundant UAH liquidity). Against this backdrop, we do not expect the MinFin to show much generosity in the near run, with the price of the new borrowings likely to be superior to their volume for the government. As a shortfall of tax revenues will grow later this year, volume of OVDP placements will likely expand accordingly, in our view. Today the regulator will offer UAH-denominated 6M, 9M, 1Y and 1.5Y notes. While demand will likely stay moderate, bid rates should inch down. The auction will also include USD-denominated 2Y notes. Two weeks ago, the government sold 1.5Y USD notes at 7.67%. Against this backdrop, 8-8.2% appears to be the most feasible yield. 

Global markets: Fed policy unchanged, negative depo rate from Japans central bank on weak economic conditions 

US economic growth slowed to 02% q/q in 4Q 2015, reflecting weaker external demand and the strong USD (exports dropped 0.6% q/q). The figure corresponds to 2.4% y/y. Against this backdrop, US Fed left policy unchanged, saying further lift-offs will be gradual and based on the countrys external economic conditions. Central bank of Japan slashed its deposit rate to -0.1%, having taken example from the ECB. The move followed the countrys lackluster growth within the last year or so. In Russia, CBR left the policy rate unchanged (11%), having indicated the policy stance may be tightened in case inflation risks grow. For the time, the regulator expects the CPI to reach 7% y/y in Jan 2017. Oil stays under pressure as weak economic data from China weighed on prices. Affecting a further blow, a senior OPEC source told a Saudi Arabian newspaper it was too early to talk about an emergency OPEC meeting. 

For more information: UkrSibbank_020216.pdf