May 19, 2015

This week in focus: Ukraines tax revenues soar 46.5% y/y against the backdrop of high inflation

Ukraines state budget balance shows surplus in 1Q 2015 first in three years. High inflation rate (60.9% y/y in Apr) drives budget revenues up. Local primary market supply is likely to be limited as long as budget deficit stays low. Meanwhile, we believe MinFin will tap the primary market mostly with FX local bonds later in the year as authorities are facing the task to build up reserves.

Currency market: USD/UAH reverts, in line with expectations

Local currency weakened during the latest couple of days, slipping to around 22 as of today morning. The weakening was no surprise to us as 20.5 levels had obviously been taken as favorable to buy USD which had finally spurred bids (while prompting exporters to suspend offers at the same time). Further pressure on the UAH stemmed from one of the state-owned banks which has been detected buying USD on Friday (apparently, for Naftogaz). We continue to expect the USD/UAH to fluctuate between 21 and 23, going forward. Naftogaz gradual switch to open market purchases (as pledged by Ukraine to the IMF) will also weigh on the UAH.

Money market: High NBU depo rates offset record liquidity volumes

Banking liquidity keep mounting, standing now at around UAH 57-58bn, by our estimates. While volumes of NBU liquidity support have stayed low, OVDP redemptions / coupon payments amounted to UAH 3.5bn over the last week. Interest rates have been unchanged, despite record balances. 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%). We attribute this to the banks massive investments into NBU CD, having outweighed their aggregate cash holdings (estimated UAH 32.2bn vs. UAH 25.3bn as of start yesterday, respectively).

Local debt market: Flat

Market saw no major changes during the past week. Bid yields for new VAT notes are 26% and 22-23% for the old ones. In the USD segment, yields are 0% for the govies due in May, 1% for those maturing in Jun and 4% in Jul. Underlying USD/UAH sticks to 24. At the same time, market gets increasingly shallower, which implies yields should continue to gradually go down. Government continues to keep off the primary market, while enjoying solid tax revenue growth. Going forward, sufficiently low yields (and hence, higher prices) should lead to a rise in OVDP sales (which is still not going to be dramatic, in our view).

Global markets: Ukraine creditor group disclose members, Greece at a brink

Ukraine's ad-hoc creditor disclosed the names of 3 other members after criticism for a lack of transparency and avoiding direct contacts with the Ukrainian government. Franklin Templeton, BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. reportedly own USD 8.9bn of Ukrainian debt. Meanwhile Head of MinFin Yaresko was reported yesterday saying talks have been proceeding harder than expected, adding also that Ukraines bankruptcy is not an option. Greek 2Y bond yields jumped to just below 24% percent and the EUR skidded more than 1% yesterday on worries Greece would not be able to make its nearest debt repayments. Meanwhile, Greek labor minister has claimed recently Athens would conclude a deal with its lenders in the coming days.

For more information: 19.05.2015.pdf