October 06, 2015

This week in focus: Outlook on Ukraine’s current account worsens

Ukraine’s current account stayed positive in Aug (USD 60mn), second month in a row. We nevertheless expect it to return into the negative territory in 4Q 2015 and are also downgrading our current account forecast to -USD 1.2bn (ca. -1.1% of GDP) for the whole year. Higher energy bill will be the main downside driver, as Ukraine resumes its gas imports from Russia, and a seasonal uptick of non-energy imports will also have a (limited) negative effect on Ukraine’s trade balance. Higher current account deficit will have a neutral effect on the UAH in the short-run, as increased deficit will be largely offset by additional inflows from foreign creditors. From a medium- to long-term perspective, pressure on the UAH will stay high however, given Ukraine’s apparent disability to eliminate its structural external deficit. 

Currency market: UAH strengthens on high FX offer, expected to retreat as supply fades

Interbank USD/UAH has been pushed down by increased FX supply, stemming from exporters. Yesterday trades closed at 21.20/21.25 and the weekly low was fixed on Thursday, when the closure rate slid to 21.0/21.10. Taking the advantage of excess FX liquidity, the regulator stepped up on its FX purchases and purchased USD 120mn at the weighted average of 21.32 during the past week, as well as USD 22.7 at 21.23 yesterday. Going forward, it appears the period of excess FX offer may soon end, as the offer of the NBU’s latest FX auction moved drastically down, and the auction rates started to edge higher. It is therefore likely that the USD/UAH will return to its more conventional levels (somewhere between 21.5 and 22.0, in a rough estimate). 

Money market: Liquidity near record highs; system clean-up continued

Banking liquidity sticks to the levels close to its all-time highs (UAH 79-80bn). Money market rates stay flat, while market demand for UAH resources appears to be rather low. In the meantime, the policymaker lowered its 1M and 3M to, respectively, 21.0% and 21.95% (from 21.9% and 23.0%), having thus “normalized” its depo rate curve and brought its 3M rate close to its main policy rate (22%). The regulator also said it had imposed temporary administration in Union standard bank, having blamed it of a “non-transparent” structure of ownership and suspiciously large cash transactions during the recent days. Speaking to the theme, last week Head of NBU said the central bank will now focus on “consolidation” of the banking sector. The policymaker also claimed it is “not normal” when 85 banks represent only 5% of the aggregate banking assets. In a separate move, NBU said it has decided to liquidate Delta bank.

Local debt market: Peace and quiet

Market activity stays subdued, with increasingly lower number of quotes being shown in the market. In the meantime, balance of the government’s Treasury account reached UAH 47.1bn as of start Oct 2015. The volume is yet another record high and is clearly boding ill for the MinFin’s future debt raising activity. Yields on OVDP sold from the NBU’s portfolio have been kept unchanged: 6M at 22.5%; 8M at 20.75%; 1Y at 20.5%; 3Y at 17%; 5Y at 15%; 10Y at 12%.

Global markets: Expectations of US rate liftoff shifted to early 2016

Weak US jobs data pushed back expectations of a US Fed rate hike to early 2016. In the meantime, dollar stays underpinned by the wide spread views that other major central banks will remain dovish, with further easing steps expected in the near future. Brent rose above USD 49 after Russia said it was ready to meet other producers to discuss the situation in the global oil market (which will possibly include an expected return of Iran to the market). The World Bank cut its 2015 and 2016 growth forecasts for developing East Asia, saying the downward revisions mainly reflects a moderate slowdown in China's economy, which it sees growing 6.9% in 2015 and 6.7% in 2016. On top of that, IMF Head Lagarde said “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016”. Ms. Lagarde added emerging economies are likely to see their fifth consecutive year of declining rates of growth, and also warned there could be a “prolonged period” of low prices for the commodities.

For more information: UkrSibbank_061015.pdf