June 08, 2015

This week in focus: Inflation slows down in May in line with expectations

Ukraine CPI slowed to 58.4% y/y last month (vs. 60.9% y/y in Apr). The slowdown is in line with our expectations and confirms our view that CPI will gradually slow further, landing at an estimated 40% y/y as of end 2015. The forecast is nevertheless subject to no material changes in the monetary and/or fiscal policy.

Currency market: USD/UAH stable as controls extended, reserves slightly higher in May

Interbank USD/UAH has stayed largely unchanged (21-21.1 on Friday close). In a positive sign, black market quotations continue to move closer to the interbank levels, hitting 21.1-21.3, by our estimates. NBU extended most of its currency / capital controls till Sep 3, 2015. As we expected, a certain loosening of the imposed restrictions is still there, but looks largely symbolic. Ukraine central bank reserves rose to USD 9.9bn in May (+USD 0.3bn vs. April). Coupled with the rapidly shrinking imports, the USD 0.3bn rise brings reserves to the estimated 2.5 months of imports of goods. We expect reserves to edge up again this month, balancing at around USD 10.1bn at end Jun. We also expect reserves to land at USD 12bn by end-2015 as reserves will rest fully reliant on additional foreign debt inflows.

Money market: Banking liquidity at new highs, banking sector clean-up continued

Banking liquidity climbed to UAH 58.7bn, by our estimates. Volume of cash placed in the NBU CDs has finally exceeded the aggregate balance of the correspondent accounts. Interest rates show no changes (ON 20/23%, 1W 21/24%, 1M 23/27%), staying tied towards the NBU depo rates. NBU continues to clean up the system. The regulator announced a decision to liquidate both Nadra Bank and Kreditprombank, placed under temporary administration in Feb and Mar 2015, respectively. National Credit bank was also recognized insolvent. Deposit Guarantee Fund has also said it had extended the temporary administration at Omega Bank until July 3, 2015.

Local debt market: Stable

Bid yields for new VAT notes are 25-26%, 23-24% for the VATs maturing in Aug. 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). Data on the local currency liquidity supports the view the government will likely continue to refrain from local primary placements until the NBU depo rates are at their current highs.

Global markets: Greece, Ukraine struggling further

The pace of US job growth accelerated sharply and views on the eurozone economy continue to improve. Greece delayed a EUR 300mn payment to the IMF due last Friday, saying it would repay the money along with other debts due this month by the end of June. While creditors sent Athens a yet another proposal last week, outlining their terms of a cash-for-reforms deal, Prime Minister Tsipras rejected the plan, calling its terms "absurd". Following the second teleconference between the parties on Friday, Ukraines MinFin said the Creditor Committees offer is both unchanged and unacceptable, calling also the creditors to discuss "appropriate burden sharing". Meanwhile, prices of Ukraine Eurobonds continue inching upwards evidencing that the markets do not believe any large haircuts will be applied at the end of the day.

For more information: 08.06.2015.pdf