July 13, 2015

This week in focus: Growing banking liquidity calls for lower NBU depo rates

Banking liquidity has crossed the UAH 70bn threshold, having climbed to all-time highs. Total liquidity growth amounted to nearly UAH 25bn since mid spring 2015, which could result from a combination of heavy OVDP repayments by the MinFin, NBU interventions, high NBU depo rates and local currency deposit growth. Meanwhile, volumes of NBU liquidity support (refinancing) have been notably reduced since mid Apr. Going forward, we believe banking liquidity will likely continue its growth. Given no quick economic recovery ahead (and hence low money demand), NBU will have to take steps to absorb this redundant liquidity. This implies the regulator will have to lower its depo rates, trying to warm up demand for the OVDP offered from its portfolio.

Currency market: UAH stays under pressure, IMF tranche likely to be delayed till Aug

Interbank USD/UAH has finally crossed the 22 threshold on Thursday and black market USD/UAH is around 24. Drivers of the elevated demand for the FX has apparently been a combination of the local currency payouts to depositors of the failed banks, jitters inflicted by talks on Ukraines default, and, probably, some other hidden factors (e.g. a shut-off of some illegal ways of FX purchase by large entities). Dollar supply may have become drier as well. Following a nearly zero current account balance and a net USD 0.6bn private capital outflows in May, FX retail deposits shrunk by USD 191mn last month. Parliament has made little progress in adopting the legislation stipulating the second disbursement from the IMF. The delay has made a top MinFin official say the money will probably arrive no sooner than in Aug 2015. 

Money market: Interest rates to move down this week

A NBU shifts to the new scheme of CD sale this Wednesday (Dutch auction, limited offer), we believe its depo rates will likely go down since 2H of the week. Tenders will take place once per week, 1M and 3M CDs will be offered. ON, 1W and 2W will reportedly be revised this Wednesday and will likely be lowered (should they be left unchanged, this will simply eliminate any demand for 1M and 3M deposits). As the NBU depo rates are effectively a floor for the money market rates, this will therefore bring the cost of fund rates down as well. UAH retail deposits gained UAH 2.5bn last month. The rise follows a UAH 3.2bn drop in May and has apparently been driven by high interest rates, as well as the generally stable USD/UAH during the previous month. As pressure on the USD/UAH has been mounting, we nevertheless believe this improvement to be only temporary. 

Local debt market: NBU adds 0.5% on 6M and 1Y maturities, says curve to stay inverted

NBU continues offering OVDP from its portfolio. Yield rates offered by the NBU have been raised 0.5% for 6M and 1Y (6M at 22.5%, 1Y at 20.5% vs., respectively, 22% and 20% one week ago); left unchanged for 3Y, 5Y and 10Y (17%, 15%, 12%, accordingly). Meanwhile, the central bank has said the yield curve for the offered OVDP will stay inverted. One possible explanation of this practice could be the regulators intention to signal its view that long-term risks are lower than those in the short run. On the secondary market, yield curves for both local and foreign currency issues have stayed virtually unchanged. 

Global markets: Grexit off table (for the moment)

Greece and its eurozone lenders have clinched an agreement, giving rise to negotiations on a third bailout package. The dedicated EU summit has started this weekend and has lasted 17 hours in total. According to preliminary data, the 3Y package will amount to nearly EUR 90bn and inter alia provides for spending cuts, tax hikes, massive privatization of state-owned assets and plans to phase out tax discounts on some islands. While further details are still to be revealed, the measures which the Greek Prime Minister has accepted are said to be very likely to that proposed by the EU on Jun 26 (and which was later downturned by the Greeks on the referendum).  Despite cautious optimism inflicted by the outcome of the EU summit, the most difficult part of the assignment may still be ahead as Prime Minister Tsipras may face hard opposition to the agreed bailout terms at home. 

For more information: UkrSibbank_130715.pdf