November 10, 2015

This week in focus: Consumer prices: a technical adjustment

Consumer prices went down by 1.3% last month, which is the deepest monthly price drop reported since at least Jan 2007. While other commodity groups (ex transportation) went up in price, monthly deflation was driven by a seasonal 32.6% adjustment of gas prices. This implies that the negative price growth is purely technical, and does not reflect a real inflation picture in Oct (with the effect of lower gas prices removed, m/m inflation in Oct is estimated at positive 1.1-1.2%). As monthly inflation rates are expected to stay moderately positive in Nov-Dec, we anticipate the end-year CPI to land at 45%. For the next year, end-year CPI forecast is downgraded to 14.0% y/y (vs. previous 10.7% y/y) as an implicit weakness of the UAH makes us believe that inflationary pressure will stay high.

Currency market: Pressure on UAH may rise in the short run; NBU reserves up to USD 13bn last month

Having stabilized at around 23 in the middle of the week, USD dipped to UAH 22.7-22.8. Black market appears to have entrenched at levels close to 24.3/24.4. Pressure on the UAH may go up in a near time. Lately, the UAH has reportedly been shored up by FX sales, carried out by one of Ukraines largest banks because of UAH liquidity shortage experienced by it. It would therefore be reasonable to assume that the UAH may turn under pressure once this bank will start moving in an opposite direction, seeking to regain its FX position. On top of that, payouts to depositors of Finance & Credit would start on Nov 4, a substantial part of which will likely be used for FX purchases. Observed drags with the IMF program do not look favorable for the UAH either. NBU reserves grew to USD 12.96bn last month. Going forward, we see the central bank end-year reserves at USD 14.1bn (in case Ukraine does not repay the USD 3bn debt to Russia) or USD 10.8bn (assuming USD 3bn note is redeemed on schedule). For the time being, each of the scenarios is equally likely, in our view. Both however assume that any further IMF funding will be delayed until after the end of 2015. 

Money market: Banking liquidity slides further

Banking liquidity continues to go down. Balances have been trimmed by nearly UAH 5bn over the past week, and were estimated at UAH 76bn as of start yesterday. New DGF payouts (made in cash) could be a reason for the observed liquidity drop. Other uses seem unlikely as the NBU abstained from FX interventions last week, MinFin continued to fend off the local currency debt market and the central bank liquidity support has remained extremely low. Money market rates stay flat. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%.  Central bank data on loans / deposits as of end-Oct is expected to be released this week, which will provide us with a further evidence of where Ukraines banking system has been heading to. 

Global markets: Delays with Kiev Eurobond restructuring to have no impact on sovereign debt deal

MinFin says holders of Eurobonds of the City of Kiev have rejected proposed restructuring terms, adding the Ministry believes the terms are fair and plans to continue talks. The terms include a 25% haircut (as compared to 20% for the sovereign notes), coupon rate of 7.75% and provision of GDP warrants (same as those provided to holders of sovereign Eurobonds). The notes are to be exchanged for sovereign Eurobonds due in 2019 and 2020. Given that the Kiev bonds do not bear a government guarantee, proposed restructuring terms are indeed very favorable, in our view. We would like to highlight that the restructuring of the Kiev bonds is an independent process, and any delay and / or failure of it would have a zero impact on the ongoing restructuring of Ukraines sovereign liabilities. Monthly US jobs data came substantially above expectations. It therefore appears odds for a Fed rate hike in Dec have now become somewhat stronger. While leading indicators indicated a further revival in the eurozone, China continued to disappoint. 

For more information: UkrSibbank_101115.pdf