July 20, 2015

This week in focus: 2Q data confirms our view of a 13.6% GDP drop this year

Contraction in industrial production, retail sales and construction works continued to slow last month. While both production activity and domestic consumption remain subdued, low 2014 comparison base has therefore started to tell on their annual drop readings. Overall Apr-Jun 2015 data points to a 15.9% real GDP decline in 2Q, by our estimates, which is generally in line with our current -13.6% GDP forecast for the whole 2015. While we believe Ukraines economy has reached its present-day bottom, potential headwinds are still there in our view.

Currency market: Pressure on the UAH eases down, IMF tranche expected in 1H Aug

Interbank USD/UAH has stabilized at around 22 and black market rates have taken hold at 24.5-24.7 over the weekend. NBU did not show up on the market last week. Parliament has finally adopted a number of laws, stipulating the next USD 1.7bn disbursement from the IMF (which would also release further bailout inflows from the World Bank, Japan and Germany, totaling USD 1.5bn). Earlier last week Head of NBU Gontareva said the payment may be approved by the IMF Executive Board as soon as on Jul 31, should the laws be adopted in a near time. We therefore expect the IMF funds to arrive in 1H Aug this year. The delay does not look critical though, as Ukraines FX debt payments are quite modest through the next 1.5 months (USD 540mn through the rest of Jul 2015 and USD 106mn in Aug, as per our records). 

Money market: Interest rates move down

As we expected, NBU has slashed its depo rates. ON rate is currently standing at 18% (vs. previous 20%); 1W and 2W rates are, respectively, 19% and 20%. Weighted average rates on 1M and 3M CDs amounted to 21.97% and 21.6%. Money market rates have moved down, respectively. ON is now 17-19%, indicative 1 week is around 18-20%, while indicative 1M is 20-23%. While banking liquidity has retreated from its record highs (UAH 76 last Monday), banks are still rich of cash (UAH 65-66bn, of which UAH 24bn rests on the correspondent accounts at the central bank). Going forward, we believe liquidity will stay same high until OVDP sales from the NBU portfolio will get more active. We therefore do not rule out that the NBU could continue slashing its depo rates during the next couple of months. 

Local debt market: MinFin to offer 1Y USD notes tomorrow; demand may still be limited by regulatory restrictions 

Offer YTMs on OVDP offered by NBU from its portfolio have been kept unchanged (6M at 22.5%, 1Y at 20.5%, 3Y at 17%, 5Y at 15% and 10Y at 12%). Demand has however been rather modest and sales were limited to 6M notes. As market participants remain risk-aversive, 2Y OVDP auction held Jul 14 saw no bids. Tomorrow the government will offer 1Y USD-denominated securities. Last time this note was sold at 8.75%, which is somewhat below market. Still, with no (marketable) FX OVDP due until Mar 2016, we believe the note will be of interest to market participants. Demand will however be limited by the present regulatory restrictions.

Global markets: MinFin sees progress in debt holder talks, Greece off the brink

Ukraines MinFin said progress had been made at talks with Ukraines foreign debt holders last week. The ministry also said additional meetings had been scheduled for this week, as parties sought to finalize the terms of Ukraine's debt operation as soon as possible. Ukraine has to pay USD 120mn of a Eurobond coupon this Friday, and MinFin has said a freeze of payments is still possible. Greek banks reopened today, for the first time in 3 weeks. The opening was made possible after ECB said it would pump EUR 900mn in emergency funding into Greek banks. Earlier Greek parliament approved the required austerity measures on Thursday, which was followed by several European parliaments giving their consent to continue talks with Athens. Meanwhile, the European Commission says Greek GDP may shrink by 4% this year, and the IMF has said Greece's debt had become "highly unsustainable". 

For more information: UkrSibbank_200715.pdf