November 3 2015

This week in focus: Current account: deficit to return in 4Q

Ukraines current account was again positive in Sep (USD 135mn). As last month Ukraine stepped up on its gas imports, we expect the current account to show a material deterioration in 4Q. Going forward we would expect the current account to stay largely flat in 12M 2016, despite an expected uptick in non-energy imports and due to further cuts in the prices of gas. On the capital account side, aggregate rollover rate of Ukraines non-government external debt picked up to 27% in Sep (as compared to 16% in Aug). In the non-banking sector, rollover rates were extremely low though (18% in Sep), reflecting Ukraines low investment appeal and thus promising no flood of foreign investments in a near future. Taking this into account, pressure on the UAH is expected to remain during the year ahead.

Currency market: USD/UAH breaks through 23

USD/UAH broke through the 23 landmark on Friday, having closed the week at 23.10.  As pressure on the UAH mounted, NBU responded by announcing an auction on Friday, aimed on FX sale to banks (instead of FX purchase, as it had been previously). The regulator sold USD 67.5mn in total, at the weighted average rate of 23.01. At each of the auctions, cut-off (= minimum) rates of the USD sale were set at 23.0. The move suggests that the central bank is still viewing to retain the USD/UAH at the upper end of the 21/23 band, and we assume this task may be rather achievable (in the short run). As higher USD/UAH will likely stimulate exporters to speed up on their FX sales, cheaper USD will prompt importers to buy, which suggests the rate may stabilize between 22.5 and 23.0 during the next week. Going forward, we would nevertheless expect the USD to go up again as exporters will likely bet on a weaker UAH and the NBU will have to return to FX purchases to build up reserves.

Money market: NBU sees short-term inflation risks, holds policy rate unchanged

NBU kept its policy rate unchanged. Commenting its decision, the policymaker cited short-term inflation risks, stemming from increased prices for heat (implemented since Oct 2015) and lower-than-expected harvest of some seasonal crops. To this end, the regulator said it expects inflation to stay relatively high in Oct (to remind, CPI grew 2.3% m/m in Sep). Looking ahead, we do not expect the NBU to show any rush on the monetary easing path, given an implicit overvaluation of the UAH, coupled with low money demand (=low business activity). On top of that, it appears the regulator may seek to keep interest rates high to encourage further net growth of UAH deposits, which would reflect a gradually restored trust towards the banking system (and, to some extent, Ukraines national currency). 

Global markets: As IMF may change lending rules, arrears to Russia should not hinder IMFs further dealings with Ukraine

In line with expectations, Russia refused to take part in the repeat noteholder meeting last week regarding restructuring of the USD 3bn note. In the meantime, Wall Street Journal reported IMF may change lending rules in late Nov 2015, which would the Fund to continue its dealing with Ukraine. In his turn, IMF Communications Director Rice indicated a mulled revision of the Funds lending policy could allow it to finance (in carefully circumscribed circumstances") countries having arrears to official creditors. While refusing to call a date of the IMF Board meeting on which such revision could be enacted, Mr. Rice said instead that it would be reasonable to expect the board would take up this issue in the near future. Outside Ukraine, leading indicators have provided further evidence of an economic slowdown in China, weighing on stocks and oil prices. While last week US Fed left the door open to an interest rate rise in Dec, Mario Draghi tried to play down expectations of a additional monetary boost from the ECB in Dec, saying it was still an open question whether further stimulus was needed.

For more information: UkrSibbank_03112015.pdf