March 15, 2016

This week in focus: Current account back in red

Ukraine's current account returned to deficit in Jan (-USD 343mn from USD 393mn in Dec 2015). Material deterioration of the balance of goods was the principal downside driver, as exports contracted faster than imports. Balance of services was also slashed to just USD 106mn (lowest since Dec 2010, at least). At the same time, contraction of non-energy imports slowed to just 6.8% y/y, reflecting the stabilizing domestic demand and the elimination of the import duty surcharge since start 2016. We retain our 2016 current account forecast at negative USD 2.1bn (2.3% of GDP).

Currency market: Calendar effects!

Local currency has progressively strengthened in the first two weeks of the month, driven by upcoming salary payments by exporters, as well as increased FX offer, following the holidays in early Mar. The trend has sharply reverted since Saturday, reflecting a drop of FX offer and making the NBU step in to mitigate the transitory fluctuations in volumes. Going forward, we expect the rate to stabilize in the range 26.5 to 27.0 in a near time, and to remain stable (in general) until end 3Q 2016. Despite its visible stability, the situation is nevertheless rather fragile, in our view, given persisting uncertainty on further IMF disbursements and signs of a political crisis inside Ukraine. Central bank reserves landed at 13.5bn at end Feb 2016, which was only USD 90mn up from the previous month and was fully due to the USD 431mn OVDP placement. It also looks like that the NBU reserves may go down this month, on the back of increased debt payments and no FX OVDP placements officially planned for the current month.

Money market: Flat

Banking liquidity has taken a downward path recently, having slid to below UAH 100bn. Volume of outstanding NBU credit to banks has persistently declined on the back of limited refinancing volumes since 2H 2015. Money market rates have been still unchanged, reflecting stable NBU depo rates. On Mar 3, the central bank left its policy rates unchanged, and we expect some softening steps in late 2Q 2016, subject to subdued inflation pressure and stable exchange rate. Deposits of individuals in the national currency were little changed last month, despite the observed rise of pressure on the UAH, as depositors were likely stimulated by high interest rates for the existing deposits, which were likely perceived as high enough to compensate for the USD/UAH volatility. According to NBU data, interest rates for UAH-denominated household deposits were slashed by nearly 1% in Jan 2016, on the back of the strong disinflation effects. This makes us expect a slow-down of UAH deposit growth in the medium run, provided no further notable depreciation of the UAH.

Global markets: Central banks time

ECB eased its monetary policy further by taking a series of unconventional measures to stir the eurozone economy: 10 bp cut in its deposit rate to minus 0.4%; refi rate slashed to zero; monthly asset purchases increased to EUR 80bn (up by EUR 20bn) and will be now expanded to investment grade corporate bonds; 4Y targeted long-term refinancing to banks at 0% to -0.4%. The subsequent surge of EU stock markets, and a slump of the EUR, went into reverse, though, after the central banks president Draghi suggested further stimulus was unlikely. ECB economic projections were still surprisingly downbeat. Real GDP forecasts were lowered to 1.4% for 2016, 1.7% for 2017, and 1.8% for 2018. US Fed starts its 2-day policy meeting today. Although gradual tightening is expected later this year, the policymaker is largely expected to stay flat on its policy rate this time. Fitch downgraded DTEK to 'RD' (Restricted Default) from 'C', having highlighted that the company is in the payment default under several bank loans.

For more information: UkrSibbank_150316.pdf