March 01, 2016

This week in focus: Industrial production almost flat

Ukraine's industrial production started the year at negative 1.7% y/y in Jan, compared to -1.5% y/y in the previous month. Going forward, short-term support may come from higher steel and ore prices and will likely be transitory. Against this backdrop, we would rather expect the y/y output to stabilize at around +1% this year. 

Currency market: Holding well for now

As we expected, interbank market saw no sharp movements last week, hovering close to UAH 27 per USD. We believe pressure on the UAH may resume soon, given no clarity regarding the IMF financing, as well as the destiny of the incumbent government and the ruling coalition.  Despite the visible market equilibrium, last week the central bank sold UAH 45mn at 27.26 (weighted average), and another USD 15mn at 27.09 yesterday. The sales were apparently made on a pre-emptive basis, as signs of potential bid/ask imbalances could be detected by the regulator. Later in the year, market volatility should go down on the back of a seasonal rise of exports (unfolding since 2Q of a year), as well as the seasonally reduced imports of gas. Rise of ore and steel prices, observed since the Chinese New Year, should also be positive for the UAH (although its effects will be seen somewhere in late 2Q 2016, in our view).

Money market: Flat

Banking liquidity has edged down continuously and was estimated at UAH 108bn as of today (compared to nearly UAH 120mn in mid Jan). Although cash balances are still very high, the slide of liquidity has taken place against the backdrop of observed decrease of the NBU credit to banks (currently close to Mar 2014 levels), supplemented also by a series of FX sales and continued UAH OVDP placements this year. Interest rates have been generally unchanged (ON 17/19%, indicative 1 week 18/20%, and indicative 1M 20/24%). MinFin borrowings totalled moderate UAH 50.5mn, raised via 1.5Y and (mostly) 3Y notes last week. In line with our expectations, demand was indeed limited and bid yields were more or less stable. Separately, NBU announced a decision to liquidate two more banks Avant (insolvency imposed in late Jan this year) and state-owned Rodovid.

Global markets: Ukrzaliznytsia restructures Eurobonds; eurozone slips into deflation ahead of ECB meeting

Eurozone slipped into deflation, bolstering expectations for additional stimulus from the ECB on Mar 10. Other reports showed that overall eurozone economic sentiment deteriorated and the consumer confidence index dropped last month. As Russia initiated legal proceedings against Ukraine on the USD 3bn note, Russian MinFin said his country is still ready to discuss restructuring options, but expects better terms than those imposed on private creditors. Commenting the move, Ukraines MinFin said Ukraine intends and is fully prepared vigorously to defend its interests in respect of this issue. Ukrzaliznytsia exchanged its USD 500mn 9.5% issue (initially due in 2018) for a sinkable 9.875% USD 500mn issue with principal payments due in 2019-2021.In the meantime, MHP has reportedly failed to obtain bondholder approval on restructuring of its USD 750 Eurobond issue due 2021 and has therefore extended / improved the proposal. 

For more information: UkrSibbank_010316.pdf