June 30, 2015

This week in focus: Government’s fiscal position seen strong despite weaker revenues

Aggregate state budget revenues increased 40% y/y in May 2015. (+36% y/y in 5M 2015). Despite strong y/y growth, aggregate budget proceeds are however UAH 7.2bn (14.5%) below those in Apr 2015. As a result, Ukraine’s state budget surplus has decreased to UAH 5.6bn in Jan-May 2015 from UAH 8.2bn in Jan-Apr 2015. The data supports our view that the inflation drive has started to lose steam. Lower volume of imports has also started to tell on the budget revenues. Looking ahead, we believe the government’s revenue generation capacity will gradually diminish, weighed by the observed disinflation and plummeting economic activity. We nevertheless see the government’s fiscal position as sufficiently strong and do not expect the government to tap the local currency debt market any soon.

Currency market: Interbank UAH stays strong, despite growing black market rates

Local currency strengthened continuously against the USD, having closed the week at 21.0-21.1 levels. The strengthening took place against the backdrop of a series of NBU interventions, made at 21.0-23.0 (bid-ask). Black market is around 22-22.5, obviously underpinned by the continuing payouts by the Deposit Guarantee Fund, as well as the negative background from the fruitless negotiations between Ukraine and its creditors. NBU said current account was virtually flat in May. Imports continued to fall faster than exports (-42% y/y vs. -45% y/y, respectively), bringing the balance of goods amounted to negative USD 162mn. Capital showed USD 330mn of net inflows (first positive reading this year) as net FDI grew by 363mn.

Money market: NBU to expand its liquidity tools, sees no quick policy loosening ahead

NBU has decided to keep its main policy rate at 30% — in line with our expectations. In its follow-up statement, the regulator says it expects the CPI to continue decelerating, although downgrades its end-2015 CPI forecast to 48%. According to the policymakers, shifting to a looser monetary policy would be appropriate, should inflationary risks subside further (we believe the policy rates could be reduced in 2H this year, subject to no additional shocks). “Financial initiative” bank has been declared insolvent (the institution was Ukraine’s 16th largest as of Apr 1 this year). Besides, Ukrgazbank has completed the takeover of “Kyiv” bank (declared insolvent and brought into temporary administration in Feb 2015). NBU has also announced it would start selling OVDP to banks from its own portfolio, with a view to sterilize excess liquidity in the banking system and enhance its interest rate policy.

Local debt market: New USD placement: demand reduced by regulatory restrictions

demand amounted to USD 160mn, with 6 bids submitted in total. It appears demand could have been larger but for the one of the FX market restrictions imposed by the NBU. As NBU deems selling OVDP to banks from its own portfolio, this should expand the OVDP supply on the secondary market – especially as the government is expected to stay off the primary market in a near future.

Global markets: Restructuring saga goes on: IMF joins up this week

Greece announced a nationwide referendum to find out its people’s stance towards the austerity steps proposed by the EU. The survey will be held on Jul 5 and some of the EU high officials have already called this a voting on whether Greece will eventually stay in the eurozone. Ukraine’s Minister of Finance Jaresko said Ukraine could theoretically suspend servicing its foreign debt liabilities at end July (apparently referring to the USD 120.3mn coupon payment on July 23). Later on, one of Ms. Jaresko’s deputies added steam, saying the government does not expect any material worsening of the economic situation in case a moratorium is indeed imposed. Meanwhile, trilateral discussions between IMF, creditors and Ukraine are supposed to be started today in Washington. Apparently trying to demonstrate Ukraine’s resolve to stay firm on its previous position, Ms. Jaresko said she will not attend the discussions. Besides that, Privatbank proposed to restructure its eurobonds due 2015 and 2016.

For more information: 30.06.2015.pdf