November 17, 2015

This week in focus: Ukrainian economy shows early signs of a revival, but outlook is still foggy

Preliminary estimates suggest real GDP grew 0.7% q/q in Q3 2015, corresponding to a 7% drop vs. the same period of 2014. While the economy has hit the bottom and will likely head north going forward, we feel less upbeat on the 3Q GDP growth and would rather expect the final GDP reading to arrive closer to -8% y/y. While so far we retain our 2015 GDP forecast at -13.6%, the forecast may potentially be upgraded to -12% range as domestic consumption has performed better than we expected and the recovery of Ukraines heavy industries have been somewhat faster than our initial projections. Despite glimmers of hope, Ukraines economy outlook is still foggy, with no quick fix in sight. Looking ahead, we expect a moderate 1.2% pickup in GDP in 2016, potentially accelerating to no more than 2-3% over the following years.

Currency market: As pressure on UAH mounts, USD entrenches above 23

As expected, pressure on the UAH mounts. Yesterday the market picked up to 23.2/23.3. Official NBU rate now stands at 23.20 and the central bank has not taken any steps to shore up the UAH. Going forward, pressure on the UAH will likely go up as exporters will bet on a stronger USD, and importers appear to have generally accepted the higher USD cost. At the same time, central banks ability to steer the market through FX sales seems rather limited, and a scope for additional FX restrictions is virtually zero. Against this backdrop, moral influence is seen to the only tool left for the NBU. On the positive note, FX deposits of individuals were virtually flat last month, having positive implications for the FX liquidity. For the time being, we retain our end-year forecast of the interbank USD/UAH at 24 and end-2016 forecast at 28. In the meantime, IMF mission started to work in Ukraine and will reportedly stay here till Nov 21. Discussions will reportedly focus on the state budget plan for the next year, as well as the government's anti-corruption practices. Although certain progress on these issues has been reported by the authorities, we do not expect the next disbursement to be made until the end of the current year. 

Money market: Recovery of UAH deposits will likely be uneven

UAH retail deposits grew by UAH 4.8bn m/m in Oct. Excluding insolvent banks, the increase was even larger (UAH 5.4bn m/m). Going forward, the bottoming-out of the UAH deposits may nevertheless be rather irregular. Inflows may decrease (or even turn negative), given the recent rise of the USD and, to a lower extent, the ongoing signs of a re-escalation of violence across the conflict areas. Although the acceleration of the local currency deposit growth may be an indication a continued recovery of the public confidence towards financial institutions, flows have likely been very uneven across the banking system. And while the UAH deposit growth could point to reduced inflation / devaluation expectations, high interest rates have likely been a significant stimulus in this case (as interest rates for the FX deposits have traditionally been materially lower than those for the UAH deposits, FX deposits of individuals were virtually flat last month). We would expect interest rates to stay high in the medium run, despite the sharply reduced inflation pressure and the record high liquidity balances, as banks will have to stimulate further deposit growth and the NBU policy is likely to remain tight next year.

Global markets: A compromise worth USD 3bn

Russian President said Russia is ready to spread the USD 3bn note over the next 3 years, with USD 1bn payable in 2016 to 2018. Putin also said he had asked guarantees either from the US, EU or a reputable international financial organization on the repayment. The offer looks like a decent compromise between the parties. While breaking the month-long standoff between Ukraine and Russia, the deal will also make life much easier for the IMF as the Fund will now be freed from choosing between bailing out Ukraine and fraying relations with Russia.  Later on Monday, an IMF representative said the proposal is a positive step and the details now need to be discussed between Russia and Ukraine, adding also that the IMF will now await the outcome of those discussions. Meanwhile, last week Ukraine issued new Eurobonds and, according to their restructuring terms, holdouts shall not receive any better terms than those agreed to by other bondholders, which means Kiev might need to obtain a waiver from holders of the restructured notes. Whether the restructuring terms offered by Putin are any better than those applied to other bondholders is still questionable, in our view. As we understand, no haircut is supposed to be imposed on the Russian note. Still, coupon rate shall remain the same (5% vs. 7.75% on other restructured issues) and Russia will not obtain any VRIs. 

For more information: UkrSibbank_171115.pdf