June 07, 2015

This week in focus: Ukraine and Greece: default tales

Rejection of the EU proposals may eventually make Athens abandon the EUR. Should it be the case, the implications outside Greece will likely include slower long-run growth in the EU, a short-lived weakness of EUR, as well as a consequential drop of Ukraines competitiveness on the EU markets. Last week was also marked by extensive speculations of Ukraines defaulting on foreign debt liabilities. Although our basic scenario provides for a comprehensive agreement in 3Q this year, we believe the impact on Ukraines capital and currency markets will be limited. One should also take into account the fact that most of Ukraines corporate Eurobond issues have already been restructured / reprofiled.

Currency market: IMF says ready to disburse if conditionality is met, reserves gain USD 0.3bn in Jun

Interbank USD/UAH climbed to 21.25-21.50 and black market has moved up to UAH 23.1-23.2 per USD. Net balance of NBU interventions, supplemented by other proceeds brought the central bank reserves to USD 10.3bn by end Jun 2015 (USD 9.9bn as of end May 2015). IMF has issued a statement saying a staff-level agreement has been reached on a set of policies needed to complete the first review under the current EFF program. The statement also says disbursement of the next portion (USD 1.7bn) of bailout funds is still subject to completion of prior actions, as well as availability of conditions for the IMF staff to assess that Ukraines public debt is sustainable. As Ukraines delay in the full implementation of the IMF conditionality does not look critical so far, we continue to expect the final approval to be in place by mid Jul 2015, followed by disbursement of the 2nd tranche.

Money market: Rates may move down shortly

NBU considers changes to its monetary policy tools: policymaker may start selling its certificates of deposit (CDs) via market tenders. Although not officially implemented so far, a tender will take the form of a Dutch auction. As the volume of such proposed CDs will be restricted, this should push the money market rates down. Of UAH 60bn of total banking liquidity, nearly UAH 40bn is currently placed in the NBU CDs, according to our estimates. As nowadays the NBU depo rates span from 20% to 30% p.a., lower rates will therefore lead to a slower growth of the UAH liquidity overhang (having recently spiked to historic highs). Separately, UkrStat said Ukraines CPI continued to slow last month, landing at 57.5% y/y. Producer prices move in the same direction, although slowing much faster than consumer prices. We expect the disinflation trend to hold on as we see no further material inflation drivers so far.

Local debt market: NBU starts OVDP sales

NBU has launched sales of OVDP from its portfolio since Friday. No sales however took place on Friday and there has been only one minor deal today, reflecting the risk-aversive stance taken by the domestic banks, as well as the fact that the proposed yields are materially below the secondary market levels. The MinFin has also published its auction schedule for Jul 2015. The government will offer 2Y UAH notes, as well as 1Y USD OVDP. On the secondary market, yield curves for both local and foreign currency issues have stayed virtually unchanged. Going forward, we do not expect any material changes in the secondary market rates in a short run. Despite an expected drop in the NBU CD rates, we believe the banks will not be in a rush to take over new OVDP holdings (at least, until the ongoing restructuring story is fully resolved). Much will however depend on the scale of the expected drop in the NBU CD rates.

Global markets: Greeks say no to austerity measures

Referendum in Greece ended with 61.3% votes against the proposed austerity measures. The main question is now whether the ECB will unfreeze its emergency lending to the Greek banks. According to media reports last week, the EUR liquidity of the Greek banks is sufficient for only a few days of their normal functioning. Without further ECB support, Athens may therefore have to implement a dual currency regime and eventually abandon the EUR as its official currency. Last week Ukraine MinFin reported certain progress on its restructuring talks with creditors. The parties had finally agreed on confidentiality arrangements, which will now allow them to get involved in direct negotiations (said to start this week). Ukraines nearest Eurobond repayment is due in September this year, which effectively gives Ukraine another two months to forge a deal without defaulting on its foreign debt liabilities.

For more: UkrSibbank_070715.pdf