January 26, 2016

This week in focus: Ukraines IP: contraction slows, prospects stay bleak

Ukraine's industrial production drop slowed to 2.1% y/y in Dec. Going forward, we expect the annual production rates to turn positive in 1Q-2Q 2016. The growth will nevertheless unwind only slowly and will likely be modest across the year (1% year average and 2% end of year) as industrial production will face a series of structural constraints.  Commodity prices will remain subdued and further external hurdles will include slowing China, lower demand from oil economies and an economic slowdown in non-oil CIS countries. Weak external environment will be supplemented by Ukraines low investment appeal, fragile domestic demand, and tight credit. 

Currency market: Testing 25

FX supply generally restored in the 2H of the week and the interbank USD/UAH stabilized between 24.60/24.90. As pressure on the UAH mounted yesterday (and the rate headed strongly towards the 25 level), NBU entered with a sell auction. Going forward, we expect the USD/UAH to settle between 24.5 and 25.0, which may also be viewed as a new target band of the NBU. Further exchange rate stability should prompt more sales by exporters and the local currency should benefit from an expected USD 1.7bn disbursement from the IMF. Last week, NBU Head said a new cooperation memo between Ukraine and IMF will be signed in the nearest days, while President Poroshenko said the disbursement will be made without a new IMF mission coming to Kiev. Against this backdrop, the likelihood that the next disbursement will be made in Feb looks rather high, in our view.

Money market: Auctions time!

Banking liquidity stands close to UAH 120bn. NBU liquidity support stays round zero and interest rates are flat, on the back of unchanged central bank depo rates. Despite a wide range of maturities offered to the market, MinFin local currency borrowings were limited to 2Y UAH 100mn notes at 19.7%. Earlier in the week, the regulator offered UAH notes due 6M to 1.5Y, none of which were sold however. Bids for USD notes were cut off at 8.0%, which allowed the government to raise USD 486mn in new debt at 7.67%. Today, the Ministry will continue to test the market for different maturities, obviously betting on reduced yields. With the NBU depo rates spanning 18% (ON) to 21.2% (3M), and the NBU policy expected to remain same tight this year, it is not exactly clear what could make the banks to face substantial cut-downs on their bid yields. Market interest (although still moderate) to long-term UAH-denominated government liabilities is still a positive development, in our view. 

Global markets: Oil back to below USD 30

Having somewhat recovered later in the week, Brent futures dropped to USD 27.1 on Wednesday as sanctions on Iran were lifted and the country outlined aggressive plans to expand its energy exports. Iraq's oil production hit a record in Dec, while Saudi Arabia signaled its resolve to allow the market to balance itself. Head of Saudi Arabias national oil giant Saudi Aramco said the company is continuing to invest in oil and gas production capacity, saying he expects the global oil supply and demand to balance at a "moderate" price soon. Against this backdrop, Russian RUB reached a new record low last week, and the benchmark Shanghai Composite ended down 6.4% over the latest trading session. By now, China's stock markets have now slumped about 22% this year, having hit a nearly 14 month low. ECB left its policy unchanged, but raised the prospect of further policy easing in Mar. 

For more infortmation: UkrSibbank_260116.pdf