February 17, 2016

This week in focus: End of recession?

Ukraine's GDP grew by seasonally adjusted 1.5% in 4Q 2015 from 3Q 2015, UkrStat’s preliminary estimates show. On an annualized basis, GDP drop slowed to -1.2% in 4Q, corresponding to an estimated -10% across the full 2015 and reflecting positive base effects. Bottoming-out has visibly started and we believe growth will increase only gradually. While our current 2016 GDP forecast stands at positive 1.2%, we see substantial downside risks that could knock this year’s growth to zero, with low commodity prices adding to weak domestic demand, and sentiments further dampened by the delays with the IMF finding.

Currency market: Changes in political risks to drive the market

Monday close rates climbed to 26.9/27.0 and yesterday the rate peaked at 27.15/27.30. Downside drivers have been supplemented by the national holiday in the USA on Monday (President’s Day), implying limited export proceeds / FX supply and potential USD/UAH overshooting yesterday. NBU stepped in with a series of sell auctions. While previous interventions were in the range of up to USD 20mn, the one that took place yesterday was indeed effective (NBU sold almost USD 50mn), sending the interbank rates down to 26.50/26.80. In the meantime, central bank’s cut-off rate soared, having neared UAH 27 per USD. 
Going forward, the FX market should get more stable and the failed government no-confidence voting in Ukraine Parliament is likely to have positive implications for Ukraine’s further dealings with the IMF. At the same time risks stemming from potential exit of smaller parties from the coalition can materialize into deeper political crisis, which consequences are hard to predict. 

Money market: Rate volatility weighs on UAH deposits; FX deposits find bottom

UAH-denominated retail deposits slid by UAH 6.4bn last month (UAH 6.2bn, excluding insolvent banks). The dip is likely a reaction to the volatility on the FX market, lower interest rates offered by certain banks, as well as the record deposit inflow in Dec (+UAH 24.5bn in total, +UAH 18bn less insolvent banks). Going forward, outflows will likely continue until the USD/UAH is generally stabilized, and as long as interest rates remain positive. FX deposits of households were largely flat, suggesting the bottom has likely been reached and that public confidence to the banking confidence gradually restoring. MinFin updated its OVDP placement schedule for 1Q 2015, having scrapped its USD placements for the rest of the quarter. In the meantime, the issuer continues to press for an upwardly sloped yield curve. As bid rates stay high, bids for the short-term durations are rejected, while placements are made at the longer end of the curve. Going forward, we do not expect any notable shifts in the MinFin’s stance, as the issuer will likely continue pressing banks to lower their yield “appetite” on the shorter end of the curve. 

Global markets: Government agrees restructuring terms of Sberbank loans

US Fed Chair testimony shed no light on the central bank’s further policy path, although mentioned a possible slowdown of prospective policy rate hikes. US retail sales were slightly above expectations and the eurozone GDP grew 0.3% q/q (1.5% y/y) in 4Q 2015. On the oil market, Azerbaijan said it has no plans to freeze oil production, responding to the announced readiness of Russia, Saudi Arabia, Qatar and Venezuela to freeze their oil output at Jan levels, in case other producer countries do the same. In Ukraine, Government agreed the restructuring terms of the USD 367mn debt of state-owned Pivdenne and Ukravtodor to Russian Sberbank. 25% of par will be written down, while maturities are to be extended to 1 Sep 2019. The debt will also be exchanged for the government Eurobonds (+VRI). Ukraine’s sovereign Eurobonds have been under pressure, on the back of the country’s political woes and harsh IMF statements.  

For more information: UkrSibbank_170216.pdf