May 13, 2015

This week in focus: Ukraine’s inflation reaches 60% y/y and will moderate going forward

Ukraine’s CPI spiked to 60.9% y/y in Apr (from 45.8% y/y in Mar), Ukrstat reported last week. Following a 10.8% m/m rise in Mar, last month prices grew by 14.0% vs. the preceding month – record growth since Sep 1995. We believe consumer inflation has reached its peak and retain our end-2015 CPI projection at 40%. That said, we do not expect any monetary easing within the coming months. 

Currency market: UAH appreciation unlikely to be sustainable

Local currency strengthened to 20.6-20.7, having appreciated continuously during the past two weeks (the rate touched 20.5 by Friday close). Black market USD/UAH has taken the same path, hovering now at 22.4-22.6 (vs. 23.10-23.40 two weeks ago). As the USD/UAH has entrenched itself below 21, the central bank has lowered its intervention rates to 20.5-22.5 from the previous 21.0-23.0. As trades get more active following the long May holidays, USD/UAH will return towards the 21-23 area, in our view. IMF mission has reportedly started its work in Ukraine. The visit is likely of fact-finding nature only, and is not going to yield any serious news / developments, in our view. Meanwhile, Ukraine's international reserves landed at USD 9.6bn by end Apr (minus USD 339mn vs. Mar).

Money market: Holiday season

Having retreated to UAH 45-48bn in the past week or so, aggregate banking liquidity climbed back to above UAH 50bn, by our estimates. Volumes of liquidity support was quite low and have been limited to moderate ON injections since the extension of the 3M UAH 0.8bn loan on Apr 29 (obtained by 2 banks at 30% interest).  Interest rates were slashed by 1% vs. end of April. ON stands at 20/23% (vs. 21/24% on Apr 30). 1W rates are 21/24% and 1M is 23/27% (vs., accordingly, 22/25% and 24/28%). Meanwhile, NBU said it is not going to raise its main policy rate. While the official CPI exceeded 60% y/y last month, Head of the NBU Monetary Policy and Research Department said any further tightening would be unnecessary as inflation pressure should subside within the next several months. 

Local debt market: No implications from Ukrzaliznytsia’s default for domestic bond market

Ukraine State Railway Company (Ukrzaliznytsia) declared technical default on its domestic liabilities. Affected facilities could likely include some USD-denominated bilateral loans from the local subsidiaries of Russian banks. Maxim Blank, the company Acting Head, said Ukrzaliznytsia would seek restructuring of 85% (UAH 32bn) of its aggregate debt load worth UAH 37.5bn, looking to complete the process within 2 months. We see no implications for the domestic bond market from the Ukrzaliznytsia’s default. OVDP secondary market sees local currency yields inching down, pushed lower by the continuing shortage of tradable govies. Bids on VAT bonds, as well as notes maturing in 1Y, are 26-25%. Dollar OVDP are also in a low supply. Yields (bid/offer) on bills due in May, Jun and Jul are, respectively: 0-0%, 2-1%, 4-2.5%. Underlying USD/UAH is 23.0-23.5 (i.e. above the black market quotations). 

Global markets: Ukraine debt talks falter as creditors are reluctant to accept haircuts

Ukraine creditor committee said it had delivered a detailed debt restructuring proposal to Kiev, representing a “compromise that balances the stated debt reduction interests of Ukraine and one of the investors' objectives of avoiding a principal reduction." MinFin responded with an official statement made on the same day, saying it is concerned about the “approach taken by the creditors’ committee” and the “lack of willingness to engage in negotiations”. While negotiations are heading for a stalemate, we assume the IMF could agree to an extension of the restructuring talks for another couple of months as Ukraine’s next Eurobond repayment is scheduled for Sep 2015. Meanwhile, Ukrzaliznytsia said it will commence discussions with holders of its privately-held debt (including the USD 500mn Eurobond) and Metinvest improved the restructuring terms for its USD 113.6mn notes due May 20, 2015. 

For more information: UkrSibbank_130515.pdf