October 19, 2015

This week in focus: External debt restructuring: debt sustainability issue delayed, but not resolved

Private holders of Ukraines government bonds have voted in favor of the restructuring. While the risk of a sovereign credit event is virtually eliminated for the nearest 4 years, long-term debt sustainability of Ukraine remains questionable, though. Aggregate debt write-down achieved corresponds to only 3% of Ukraines total public debt load, and each UAH 1 of devaluation would bring its debt / GDP ratio 3% higher, by our estimates. Further injections into Naftogaz, DGF and, very likely, state-owned banks will be additional powerful public debt driver, as well. Although generally resolved for the nearest 5-6 years, the issue of FX liquidity may arise again since 2021, when payouts under the VRIs will get launched. Taking this into account, we would not exclude the government to take another round of restructuring efforts in future. 

Currency market: Downside risks persist, despite stronger UAH

Weighed by increased offer of export proceeds, USD/UAH closed Friday at 21.25/21.35 (as compared to 21.7/21.8 at the start of the week). Boding well for the UAH in the short run, FX deposits of individuals were virtually flat last month. As stabilization trend entrenches, gradual bottoming-out seems feasible during the next couple of months, other things equal. On another positive note, the EIB and the World Bank will provide USD 520mn to Ukraine to finance its gas imports this year. Broader macro environment is still rather unfavorable for the UAH, in our view, with pressure stemming from the unresolved external misbalances. Minister of Finance said Ukraines bailout inflows may total USD 4bn through the rest of the year, including USD 1.7bn from the IMF. The next IMF disbursement may be delayed though, given Ukraines limited progress on its anti-corruption agenda. Further cost-cutting efforts will also be another point to discuss, given expected drops in Ukraines budget revenues through the next year. 

Money market: Public confidence in banking system seems to gradually restore

Local currency retail deposits gained UAH 2bn last month, of which UAH 3.1bn was placed in solvent banks (insolvent institutions therefore saw a nearly UAH 1.1bn net outflow). Bottoming-out trend is therefore getting more pronounced. On top of that, cash in circulation decreased by UAH 5.2bn (almost 2%) m/m, which may also point to the populations increased confidence towards financial institutions.  At the same time, the situation is obviously still very shaky, both in the short run (the recent appreciation of the cash USD) and in the medium term (external misbalances and retained FX / capital controls). As we expected, banking liquidity continued to grow and is now estimated at UAH 84.3bn, of which UAH 26.2bn was placed on the correspondent accounts with the central bank this morning.  Money market rates stay flat. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%. 

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: 6M at 22.5%; 8M at 20.75%; 1Y at 20.5%; 3Y at 17%; 5Y at 15%; 10Y at 12%.

Global markets: China growth slows to 6.9% in 3Q, ECB meeting eyed this week

China's economic growth dipped to 6.9% y/y in 3Q 2015, which is its lowest pace of growth since 2008 crisis but still above market expectations, having pushed equity markets higher. The relatively slow Chinese growth weighed on oil prices (Brent is slightly above USD 50 a barrel), which were also hurt by lower oil exports by Saudi Arabia. EUR trades near a 10-day low against the USD, as investors eye an ECB meeting later this week, with a potential of more easing steps from the regulator kept in mind. Meanwhile, ECB policymaker Ewald Nowotny said that while the central banks current policy could be described as neutral, there may be a need for it to become expansive. Annual inflation in the eurozone turned negative in Sep due to sharply lower energy prices, maintaining pressure on the ECB to increase its asset purchases to boost prices.

For more information: UkrSibbank_191015.pdf