November 23, 2015

This week in focus: Industrial production: drop slows but outlook still weak

Drop in the industrial output continues to slow down on a yearly basis.  Last month industrial production slid by 5.0% y/y, which posed a marginal improvement following -5.1% y/y in Sep and -5.8% y/y in Aug. The data is still in line with our previous views, stating that further recovery of Ukraines industrial production will be indeed slow. While mining fares relatively well, manufacturing continues to slide. And as output grew 7.3% vs. Sep, this was still a seasonal development. Going forward, we confirm our view that a marginal growth will likely be seen no earlier than since 2017, which we tentatively attribute to an expected uptick of investments, improved business conditions in the EU and assumed status-quo in the eastern regions during the next year. The expectations may still be worsened, given the recent escalation of tensions in Donbas. Further risks stem, in particular, from the observed delays of the IMF funding, as well as potential tensions across Ukraines political landscape.

Currency market: USD/UAH crosses 24 to be continued

Local currency plummeted from 23.15/23.30 on start Monday to 24.0/24.1 per USD by end Friday. NBU stepped in with a series of auctions on FX sale, but it therefore appears that the NBUs primary goal has been to smoothen and/or decelerate the devaluation, rather than to stop or revert it. Going forward, the UAH looks pretty weak. While the NBU readiness to defend the 24 threshold is still a question, we believe the NBU may step up on FX sales once the exchange rate moves (sustainably) to above 24. Moods appear to be indeed low and further material devaluation can therefore lead to an additional FX buying spree, which will likely be coupled with the FX offer being held off. It is also important that the IMF mission stayed in Kiev during the past week, which means the NBU could try to fend off the FX market (thus evidencing its dedication to the floating exchange rate regime). Once the mission is off, central banks actions may therefore become bolder. Going further, the interbank rate may still touch the 25 level by the end of the year, in our view. IMF mission completed its stay in Ukraine. The follow-up statement has been indeed short and straight-forward, signaling that the talks will be continued once the next year budget is drafted. We retain our view that the next disbursement will likely be delayed until after end 2015. 

Money market: Flat

The week has been very quiet, with no material news released. Banking liquidity has recovered firmly to above UAH 90bn and the correspondent accounts have been above UAH 25bn. Money market rates stay flat (ON is 17/19%, 1 week is around 18/20% and 1M is 20/23%). Separately, NBU pointed to improved capital and liquidity ratios of the banking system.  Banking systems aggregate CAR rose from 7.09% in Sep to 9.90% in Oct, NBU said last week. With the insolvent banks excluded, the regulatory capital adequacy ratio stands at 11.70%. According to the policymaker, the improvement took place on the back of the resolution of Delta Bank and equity injections by Pravex Bank. The regulator added it now expects a number of banks from among 20 largest to approve their recapitalization plans (based on the diagnostic studies completed this fall). The central bank also reported improved liquidity ratios across the system, but pointed to increased credit exposure under the banks related party transactions. 

Global markets: Ukraine lifted by Fitch, Moodys; EUR/USD viewed to reach parity on divergent policy paths

Fitch upgraded Ukraine to CCC from RD. Moodys did the same, having lifted Ukraine to Caa3 from Ca. (Caa3 corresponds to CCC-, as we take it). Both moves look a bit late, in our view, as the debt swap had been completed several weeks ago. Moreover, Ukraine's new bonds are currently traded at around 8% yield (i.e. bond price close to par) for the 2019-2020 maturities, which corresponds to yields of issuers having medium credit risk metrics. Fitch also said it will not consider a non-payment of the USD 3bn debt to Russia as a sovereign default. Keeping with the theme, Russian Deputy Minister of Finance said technical consultations regarding the restructuring of the USD 3bn note may start since Dec 8, which will require an official approval from the IMF. In the meantime, Ukraines Prime-Minister kept insisting Russia will not be treated more favorably than other creditors. All in all, it appears that the final word rests with the IMF (which will likely favor the Russias proposal). Elsewhere in the world, markets view the EUR to fall toward parity with the USD through the coming months, driven by divergent policy paths taken by both the US Fed and the ECB.  

For more information: UkrSibbank_231115.pdf