September 28, 2015

This week in focus: Uptick in the short-term data amid bleak outlook

2Q 2015 GDP readings came out slightly above our expectations, providing grounds to improve our 2015 annual GDP forecast (currently at -13.6% y/y). Dip in retail sales has been lower than we anticipated, and the pace of their bottoming-out has turned faster than we expected initially. Medium-term outlook remains bleak, however, with L-shape recovery expected since 2016. Reforms are likely to unfold only gradually, and low commodity prices are seen to be a major headwind ahead. Other industries remain weak as well, having performed worse than the war-affected metals and coal mining. Given Ukraines crucial reliance on its agricultural sector, prospective recovery may turn to be rather uneven as well. 

Currency market: NBU gets more flexible on FX purchases; end-year reserve forecast improved to USD 14.1bn

Interbank USD/UAH stayed subdued during the week, having hovered at below 22 during the week. NBU has become more flexible in terms of its FX purchases, having effectively abandoned its 21/23 band of interventions and shifted its bid rates towards a more market-based level. The regulator thus purchased USD 73mn at 21.66 on average during the past week. The NBU has also announced it had entered into a swap agreement with the central bank of Sweden, totaling an equivalent of USD 500mn and intended to shore up Ukraines FX reserves. Going forward, we upgrade our end-2015 central banks reserves forecast to USD 14.1bn (compared to previous USD 13.4bn), which is still based on an expected redemption of the USD 3bn note held by Russia. FX controls may be removed by mid 2016, NBU Head Gontareva said last week. The timeline is in line with our expectations as we have already claimed that any serious loosening of the restrictions is possible no sooner than in 1H 2016.

Money market: NBU policy rate cut: no implications

NBU lowered its policy rate to 22% from 27%.  In line with this move, the NBU has also slashed its ON refi rate to 22% (from previous 27%). Still, as NBU depo rates  have been kept unchanged, the implications of this policy rate cut will likely be minimal (if any). As of this morning, interest rates were: ON 17/19%, 1 week 18/20%, 1M 20/23% - i.e. flat vs. the past week. In our view, effective monetary easing should include lower central bank depo rates, which are effectively a floor for the money market rates. In the meantime, aggregate banking liquidity spiked to an estimated UAH 80.5bn as of today morning, having once again created an all-time record. DFG said payouts to depositors of Finance & Credit may reach UAH 10.5bn (out of UAH 17.0bn of total retail deposits stuck in the bank as of Sep 18, 2015).

Local debt market: MinFin says no plans to tap local debt market this year

Deputy Minister of Finance said the government does not plan to tap local debt market this year, having referred to the high balances of the governments Treasury (UAH) and FX accounts. As of Sep 1, balance of the governments Treasury account reached UAH 43.5bn, which is Ukraine absolute record high, as per our records. Moreover, according to the latest MinFin data, state budget deficit reached UAH 2.7bn in Jan-Jul 2015 (as compared to UAH 32.8bn in the same period of 2014, and the deficit ceiling of UAH 76bn for the whole year 2015). While social payments have been recently increased, governments cash position stays sufficiently strong for the state to abstain from new borrowings on the open market till the end of the year. The situation may however change in 2016 already, as authorities will lose some sources of funding, on the one hand, and will have to increase budget expenditures (primarily, social and defense), on the other.

Global markets: Ukraine CDS likely to get triggered next week; Ukraine Exchange Offer details

According to the Exchange Offer submitted by Ukraine to its noteholders, repayment date of the issues originally maturing in 2015 has been moved to 2019, with no 9-year amortization schedule thus stipulated. Payments under the GDP warrants are uncapped, which implies total payouts may prove to be above the 20% haircut in case Ukraine reaches good growth going forward. While terms of the GDP warrants stipulate no call option for Ukraine, they do stipulate a put option for the noteholders in case inter alia a payment moratorium is enacted (with the underlying par being effectively the same 20% haircut). In the meantime, prices of the underlying securities have stuck to around 80%, further evidencing the high attractiveness of the investment. Ukraine CDS will likely be triggered next week as last week ISDA EMEA Determination Committee has ruled that a Potential Repudiation/Moratorium event has occurred. According to the ISDA rules, for the CDS to get triggered,  determination of a Potential Repudiation/Moratorium event has to be followed by a bond issuers failure-to-pay (or a forceful  restructuring), taking place within 60 days after such determination. Given a 10-day grace period under the USD 500mn notes, the failure-to-pay will take place already next week, which implies the relevant CDS contracts should be triggered accordingly. 

For more information: UkrSibbank_280915.pdf