February 09, 2016

This week in focus: 2016 current account deficit likely to widen to USD 2.1bn (2.5% of GDP)

Ukraine's current account deficit shrunk to USD 204mn in 2015, following USD 418mn surplus in Dec. The 2015 deficit stands close to -0.2% of GDP, by our estimates, compared to -3.5% in 2014. Going forward, we expect the current account deficit to grow to around USD 2.1bn (2.5% of GDP) this year against backdrop of low commodity prices.

Currency market: Hovering around 26

As pressure on the UAH mounted, interbank USD/UAH was crossing 26 in the 2H of the week. On Friday, the NBU stepped in with a sell auction, which was the first central banks intervention since Jan 25. While pressure on the UAH will likely hold on, we do not expect the NBU to actively tap on reserves to shore up the UAH in a near future. Last week, NBU said its FX reserves inched up to USD 13.4bn in Jan. While the current volume of the reserves is generally enough to cover Ukraines FX needs for the nearest 9-12 months, sources of their replenishment are indeed limited. Meanwhile, addressing the Parliament, NBU Head said there is nothing extraordinary about the UAH weakening and the exchange rate corresponds to fundamentals. Against this backdrop, we continue to expect a gradual depreciation going forward, and uphold our end-2016 forecast of USD/UAH at 30. We also maintain our view that the UAH weakening will be incremental, as authorities will seek to preserve macroeconomic stability and rein in inflation.  

Money market: Government bond market is back to life

NBU said it would stop selling its 3M certificates of deposit, giving way to OVDP placements of the same tenor. Commenting this step, the regulator also referred to the need to build up a yield curve for the NBUs monetary policy framework (obviously implying a central banks prospective shift to inflation targeting regime). The move looks fully logical, in our view. While an NBUs shift to inflation targeting appears to be a rather distant perspective in the current circumstances, high NBU depo rates would normally divert banks from investing into government notes. Last week MinFin raised another UAH 487mn via 1.5Y and 2Y UAH notes. On the shorter end, activity stays subdued, though, obviously reflecting the contradiction between the MinFins desire to bring interest rates down and high NBU depo rates faced by the commercial banks. In addition, the regulator raised USD 431mn via 2Y OVDP at 7.85%. Today offerings will traditionally include 6M, 9M, 1Y and 1.5Y UAH OVDP. On top of that, the government will sell 3M UAH notes. Although the NBUs 3M CDs were last placed at 20.7%, we believe this rate to be absolutely unacceptable for the government.

Global markets: Following strong labor data, US retail sales data, Yellen testimony expected this week

Crude oil prices eased today as a meeting between oil ministers of Saudi Arabia and Venezuela showed little indication that steps would be taken to boost prices. USD slipped on expectations that the Fed might opt to delay further policy rate hikes. Later on, solid numbers on US unemployment and wage growth helped to stabilize the currency. Going forward, data on US retail sales expected this week will give more clues to the state of the world's largest economy. Market participants will also be focused on the US Fed Chair testimony to the House Financial Services Committee this Wednesday. Leading indicators suggest further slowdown in all BRICS countries, except India. Most of developed states are still in the growth area. 

For more information: UkrSibbank_090216.pdf