May 25, 2015

Ukraine Capital Markets Weekly. Industrial production finds bottom, retail sales still in free fall

Dear Client, we are pleased to offer to your attention the latest issue of UkrSibbank Capital Markets Weekly focusing on key developments of Ukrainian financial markets.

This week in focus: Industrial production finds bottom, retail sales still in free fall

Slump in retail sales decelerated to 29.6% y/y in Apr. We consider this improvement to be one-off and continue to expect the retail sales to drop further, reaching around 35% by end 2015 and staying the principal negative GDP driver this year. Contraction in industrial production quickened slightly, landing at 21.7% y/y last month. Going forward, we believe industrial output has neared its present-day bottom and expect the annual drop numbers to decelerate materially since mid 2015. Bottoming out appears to be a distant perspective though, and is expected to gradually unwind since mid 2H 2015.

Currency market: Reserves to get further boost from EU money

UAH weaken to above 21 during todays trade. The weakening is however purely technical as today is a public holiday in the United States (Memorial Day), which has led to a temporary shortage of USD. Local currency stayed strong through the past week, having closed Friday at 20.6 per USD. NBU has been staying away from the market (no interventions). EU and Ukraine signed another EUR 1.8bn loan package (3rd Macro-Financial Assistance program). The funds will be disbursed in 3 installments, of which EUR 600mn is promised to arrive these days. The rest is supposed to be disbursed in 2015-2016 subject to Ukraine implementing reforms.

Money market: Household deposits point to tentative stabilization

Banking liquidity stays high at around UAH 55bn, by our estimates, and interest rates showed no changes. ON is 20/23%, 1W is 21/24% and 1M is 23/27. Local-currency deposits of individuals rose 2.4% m/m in Apr, despite deeply negative real interest rates (first positive reading since Jun 2014). FX deposits of individuals showed their lowest pace of decline since Dec 2013 (USD 231mn or -2% vs. April), although contracted for the 19th month in a row. Both data series are in line with the notably improved situation on the FX market, and may point to some tentative signs of stabilization in Ukraines financial system, going forward. We feel cautiously optimistic and would generally expect deposits to gradually recover from the 2014-2015 blows. Recovery in public confidence will likely be quite slow, though, due to both unsettled conflict and the overall frustration across the society. Political risks are relatively high as well, in our view.

Local debt market: Dull

Market saw no major changes during the past week. Bid yields for new VAT notes are 25-26%. Bid yields on 1Y notes are around 24.5% and 23-24% on VAT notes maturing in Aug (old VATs). In the USD segment, yields are 0% for the govies due in May-Jun and 3% for the notes due in Jul. Notes maturing in 2016 see their bid yields standing at around 12%. Underlying USD/UAH lowered to 22.5-23.0 (bid-ask). Government keeps off the primary market.

Global markets: Expectations of US policy rate rise rekindle, Greece heads to default

EUR got under pressure after Greek interior minister said yesterday that Greece cannot make debt repayments to the IMF next month, unless it manages to reach a deal with its lenders. The progress in talks between Athens and its eurozone creditors has apparently been limited so far. In a speech to US business community, Head of the US Fed Yellen said she expected the US central bank to raise interest rates this year, as the countrys economy was on course to bounce back from a sluggish 1Q 2015. Meanwhile US core CPI increased 0.3% though, showing the largest rise since Jan 2013 and accelerating from 0.2% in Mar. US housing starts jumped to their record level in more than 7 years last month and building permits soared, triggering hopes for a revival of the US economic activity in 2Q 2015.

For more information: UkrSibbank_25.05.2015.pdf