November 30, 2015

This week in focus: Fiscal inflection point

Ukraine's state budget surplus lowered to UAH 2.8bn in Jan-Oct this year. Given a UAH 8.8bn surplus in 9M 2015, this implies a UAH 6bn deficit recorded last month, which is the first negative reading since Jul 2015, as well as the largest shortfall since Jan this year. The marked deterioration is not unexpected to us as earlier we claimed that the inflation tax will wane in 2H 2015 and the impact of the weaker will also weaken as imports go down. Meanwhile, uncertainty over the 2016 budget seems to be the major downside driver for the UAH. As the 2016 budget will apparently be adopted no sooner than by end 2015, the next IMF disbursement will be delayed till mid Jan 2016 (at the very least). Taking this into account, we believe pressure on the UAH will remain alleviated during the next 1.5-2 months, while steps from the NBU to shore up the national currency will likely be same moderate.

Currency market: USD/UAH stabilizes at 24 (for a while)

USD/UAH seems to have stabilized at around 24. NBU has mostly sold USD, trying to further anchor the rate at around 24. Volumes of FX sales were still moderate (USD 28.8mn Monday-Tuesday at around 23.97), being apparently an additional sign that the markets heads for a short-term equilibrium. Moreover, on Thursday, the regulator took advantage of the lower USD rates and purchased USD 2.8mn at 23.43.  We retain a bearish view on the UAH. Going forward, sellers will likely try to test new levels and importers may be more inclined to buy at higher rates, taking into account the recent leap of the greenback (several weeks back some of them tried to outwait the spell of the weaker UAH, having initially delayed their FX purchases). 

Money market: Quiet

Banking liquidity hovers at slightly above UAH 90bn and the correspondent accounts are UAH 26-27bn. Money market rates stay flat. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%. Going forward, we do not expect any material changes to take place in a near future. As the UAH stays under pressure, NBU policy will remain restrictive and the central banks efforts will be focused on a further clean-up / sanitation of the banking system.

Global markets: Ukraine launches restructuring of City of Kiev Eurobonds; ECB policy meeting viewed this week

City of Kiev announced a noteholder meeting regarding its USD 300mn 9.375% Eurobonds. The meeting is scheduled for Dec 8. The principal of the notes is proposed to be exchanged for sovereign 7.75% bonds, totalling USD 225mn, of which USD 112.5mn will be redeemed in 2019 and another USD 112.5mn in 2020 (i.e. a 25% haircut). The holders will also receive GDP warrants worth USD 220 each, plus additional GDP warrants worth USD 30 for those who will vote in favor for the transaction.  Oschadbank restructured its USD 100mn subordinated debt (issued in 2006 and originally due in 2017). The loan will be exchanged for Eurobonds due 2024 paying 6M Libor + 6.875%. 50% of the notes will be repaid in Jan 2020 and the rest will be settled in 8 equal semiannual payments thereafter.  US data continues to support views that the Fed will raise interest rates at its Dec 15-16 policy meeting. Investors are focusing on the ECB's policy decision this Thursday. 

For more information: UkrSibbank_301115.pdf