October 12, 2015

This week in focus: End-year CPI forecast retained at 46.6%

Ukraines consumer prices resumed growth in Sep, having advanced 2.3% vs. Aug. As the inflation data has been in line with our expectations, we retain our CPI forecast at 46.6% for the end of 2015, and expect it to moderate to nearly 11% y/y by end 2016. Fiscal policy will likely stay restrictive, and nominal wage growth is still lagging behind inflation rates. On the supply side, consumer prices will be constrained by the stable FX rate, reduced devaluation expectations and, to a lesser extent, low commodity prices. Risks are skewed to the upside, however, given mounting populist initiatives among the Ukrainian politicians and a potential breakdown of truce in the East. Limited progress on the reform agenda may also lead to delayed / reduced support from Ukraines creditors, with negative implications for the exchange rate and, consequently, price stability.

Currency market: UAH weakens, in line with expectations; NBU reserves up to USD 12.8bn last month

As we expected, signs of a shallower net FX offer have finally materialized into a weaker UAH on Friday. While the day closed at 21.7/21.8, trades were carried out between 21.5 and 21.6. Today is an official day-off in the USA. Temporary shortage of the USD may therefore push the UAH down today, and FX offer may be somewhat elevated tomorrow. NBU reserves increased to USD 12.8bn by end Sep 2015. The data is generally in line with our end-year forecast of USD 14.1bn, which is still subject to repayment of the USD 3bn notes held by Russia and the 3rd IMF tranche to be obtained until the end of the current year. Meanwhile, IMF mission has left Ukraine and will return in early Nov for further discussions, according to the Ministry of Finance. While no dedicated statements have been made by the IMF itself, we suspect the Fund could be somewhat discontent with the progress that Ukraine had made in implementation of its undertakings under the bailout deal. To this end, we believe there could be delays with further funding going forward both from the IMF and, as a result, from other official sources.

Money market: Liquidity spikes to UAH 83bn

Banking liquidity continues to grow and is now estimated at UAH 83bn.  Going forward, liquidity may grow even more as the local currency OVDP repayments will total UAH 1.1bn this week, with another UAH 1.7bn due in the next week. Closer to the date of elections, the balances will likely go down, nevertheless. Money market rates stay same high, nevertheless, underpinned by the NBU CD rates and low credit activity of the local banks. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%. In the meantime, bank Kontrakt has been declared insolvent as the NBU said the institution had been involved in fraudulent activities and had also been short of liquid assets. As of end Jun 2015, the bank was Ukraines #82 in terms of assets. 

Local debt market: No changes

Market activity stays subdued. There is increasingly lower number of quotes being shown in the market, especially for USD-denominated notes. Yields on OVDP sold from the NBUs 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: Holders of 2015 notes support restructuring

Holders of the 2015 Eurobonds have approved the restructuring terms proposed by Ukraine, according to a statement of their legal advisor, Shearman & Sterling. It appears, chances of a complete approval of the proposed restructuring by private holders are therefore virtually certain. In the meantime, Ukraine and Russia continue to stay odds over the destiny of the USD 3bn note due in Dec 2015. We do not expect any further developments on this front at least until the restructuring of the private Eurobonds holdings is completed (which is expected in Nov this year). City of Kiev has officially suspended its Eurobond payments, which include USD 250 due 6 Nov 2015 and USD 300mn due 11 Jul 2016. Authorities also said restructuring talks are underway. As the notes do not bear the government guarantee, the restructuring conditions may be somewhat less favorable than those applied to the sovereign notes, according to market rumors.

For more information: UkrSibbank_121015.pdf