October 28, 2015

This week in focus: Ukraines industrial production: stagnation looms

As industries related to metals and mining returned to growth, drop of Ukraine's industrial production continues to slow down (-5.1% y/y last month vs. -5.8% y/y in Aug and -13.4% y/y in Jul). As baseline effects have now nearly faded, further recovery of Ukraines industrial sector will likely be very slow though, with signs of stagnation getting increasingly visible going forward. Both domestic consumption and exports stay weak, fiscal policy will remain restrictive next year and any monetary easing steps are not likely to be implemented until mid 1H 2016 at least. This makes us believe that Ukraines industrial production will stay largely anemic during the next year, with only marginal growth expected since 2017.

Currency market: UAH heads down, as expected 

As FX bids mounted, USD/UAH crossed the 22 landmark last Tuesday and has swiftly headed upwards (Friday closed at 22.9/23.0 and yesterday finished at 22.88-22.92). Cash USD has also been on the rise, having reached 24.00/24.25 by now. As pressure on the UAH mounted, NBU stepped with an intervention at 21/23 Monday-Tuesday, and its FX auction was scrapped on the same days. Earlier last week NBU cut-off / weighted average rates were brought up to 22.6, which suggests the regulator feels comfortable as long as USD/UAH stays below 23. Our views on the UAH remain bearish and we generally expect it to hold to a descending trend going forward. As the local elections are over, IMF mission is coming back to Ukraine. Among other things, discussions will likely be focused on the proposed tax reforms (and ways to compensate a subsequent reduction in tax revenues) and Ukraine's stumbled anti-corruption practices. Meanwhile, it looks like the next disbursement from the Fund will be neither quick nor easy.

Money market: Liquidity crosses UAH 90bn threshold

Banking liquidity continues to mount and is now estimated at around UAH 90bn (of which UAH 23.5bn rests on correspondent accounts and the remaining UAH 66bn is parked into NBU CDs). Moreover, yesterday liquidity climbed to UAH 92bn, which has been absolute high in Ukraines history. With the new record high having thus been reached, balances have been underpinned by: regular FX purchases by the NBU (UAH 9.5bn since the onset of FX auctions on Sep 19); UAH OVDP payouts (affected each Wednesday and amounting to UAH 1-1.5bn a week); interest payments on NBU CDs held by banks (interest rates span from 18% to 21.5% p.a.). Money market rates stay same high though, as banks stay prone to park their free cash into NBU CDs. ON is 17/19%, indicative 1 week is around 18/20%, indicative 1M is 20/23%. 

Local debt market: Looking forward to 2016

Market activity remains subdued. Bid yield for the notes maturing in Jul 2016 stand at 20.7% (vs. 21.5% just one week ago, reflecting pots of unused liquidity within the banking sector). Looking ahead, an expected cut-down of state budget revenues next year may still lead to a revival of the government debt market in the UAH segment. Besides, as macrofinancial stability will continue to restore, the NBU will have to slash its depo rates to stimulate lending to the real sector (which wed tentatively expect by mid 2016, in the current circumstances). This should also prompt banks to increase their UAH OVDP holdings in a bid to set off lower yields from the NBU CDs. For the USD OVDP, the future looks indeed vague though, as in fact all of Ukraines FX needs are covered through bailout inflows and the NBU will be rather focused on building up net reserves (i.e. reserves excluding FX borrowings) through open market purchases. 

Global markets: China cuts rate, ECB signals more stimulus may be on cards

China's stocks and bonds rose after Chinese central bank came out with yet another interest rate cut last Friday, in a bid to stir up the economy. Benchmark lending rate was slashed by 25 b.p. to 4.35% and the 1Y benchmark deposit rate was also down by 25 b.p. to 1.5%. On its policy meeting last week, ECB held rates unchanged but signaled it was ready to boost stimulus as needed. The regulator is studying new stimulus measures that could be unveiled as soon as Dec and is prepared to cut its deposit rate deeper into negative territory to fight falling prices, Mario Draghi said on Thursday. S&P upgraded Ukraine to B-. The move has been very well expected and follows the virtual completion of the restructuring deal (despite the unresolved issue of the Russia owned USD 3bn bond). Several days later Fitch said Ukraines ratings will be picked up as soon as the bond swap is completed.  

For more information: UkrSibbank_281015.pdf