June 03, 2015

Ukraine Capital Markets Weekly. 4M budget performance: inflation drive loses steam

Dear Client, we are pleased to offer to your attention the latest issue of UkrSibbank Capital Markets Weekly focusing on key developments of Ukrainian financial markets.

This week in focus: 4M budget performance: inflation drive loses steam

State budget surplus surged to UAH 8.2bn in 4M 2015 a nearly twofold rise vs. 1Q 2015. The upturn was however triggered by one-off factors such as additional proceeds from the sale of 3G licenses and a spike in the central bank transfers in Apr. Without these inflows the budget balance would have turned negative, including on a 4M basis. The data implies that the inflation drive could start to lose steam, as the deepening economic crisis is taking its toll. We are nevertheless sticking to our view that the 12M 2015 state budget deficit target (UAH 75.8bn, or 4% of GDP by our estimates) will likely be met as high revenue growth in 1Q and a UAH 45bn reserve of central bank transfers should set off a slower revenue growth in future.

Currency market: Currency controls to be extended

An overwhelming majority of the FX market controls will be extended, NBU said at its yesterday meeting with banks. The new expiration day is said to be Sep 3, 2015. Ukraines current account balance stayed positive in Apr (USD 187mn) as imports continued to drop faster than exports, bringing the trade balance of goods to its first positive reading since Jan 2009 as per our records. Capital account was still negative, though, having landed at -USD 355mn (-USD 563mn ex government borrowings). IMF mission completed its stay in Kiev. In a follow-up statement IMF said Ukraines commitment to the reform program remains strong. Non-completion of the foreign debt restructuring condition may lead to a delay of the second disbursement, though.

Money market: Monetary loosening is still far away, despite expected disinflation

Situation on the money market stays unchanged. Banking liquidity sticks to its usual highs (currently at UAH 53bn, by our estimates). Interest rates show no changes (ON 20/23%, 1W 21/24%, 1M 23/27%). NBU Monetary Policy Committee (MPC) said subsiding pressure on the UAH makes room for a looser monetary policy in the near future, MPC said. Main policy rate was nevertheless left unchanged (30%), as the MPC said monetary policy should focus on restraining the second-round effects of inflationary shocks that had already materialized. Expected disinflation does create ground for a future monetary loosening, in our view. We nevertheless believe that monetary easing should be viewed as a medium-term perspective, though.

Local debt market: SFS mulls new VAT bond issue

Head of State Fiscal Service mulls a new VAT bond issue, with a view to refund the UAH 12bn in VAT arrears. New VAT bond issues are not envisaged in Ukraine-IMF memorandum, however. This fact makes prospects of such new bond issue rather vague, in our view especially given robust government revenues and the state budget surplus seen in 4Q 2015. Bid yields for new VAT notes are 25-26%, while same for the VAT notes maturing in Aug are around 24.5% and 23-24%. In the USD segment, bid yields for the notes due in Jul are nearly 2-3%. Notes maturing in 2016 see their bid yields standing at around 12%. Underlying USD/UAH lowered to 22.5-22.7 (bid-ask).

Global markets: Ukraine borrowers continue their restructuring efforts

Ukraine placed a 5Y USD 1bn Eurobond issue, with the principal secured by the US government guarantee. Meanwhile, government talks with its foreign debt holders plough on, with no positive results reported over the past week. Ukreximbank said it had reached a deal with 30% of holders to restructure in 2015, 2016 and 2018 Eurobond issues. Restructuring terms include the bonds maturity extension by 7 years, higher coupon rates, as well as no haircuts. Oschadbank said holders of its foreign debt liabilities created a creditor committee to discuss a reprofiling of the bank's debt, and Ferrexpo announced an exchange offer on its USD 285.7mn Eurobond issue due 2016. Prospects of the Greek governments default loom large as Athens is due to make a EUR 300mn repayment to the IMF on Friday and has still not reached an official agreement with its creditors.

For more information: 03.06.2015.pdf