This week in focus: FX controls extended
As we expected, central bank’s FX and capital controls have been extended. Now effective till Dec 3 this year, some of them were softened. In line with our expectations, the softening is still modest enough and is rather an elimination / correction of existing drawbacks. Looking ahead, any serious loosening is possible no sooner than in 1H 2016, in our view, as preconditions for this will include the full transition of Naftogaz to the interbank market, coupled with an “adequate” level of FX reserves accumulated by the NBU (as it is stated in the latest IMF memo).
Currency market: NBU reserves up to USD 12.2bn last month
NBU reserves gained USD 2.2bn last month, having landed at USD 12.2bn as of end-Aug (in line with our expectations and highest since Oct 2014). The USD 2.2bn growth was due to additional bailout inflows from international official creditors. According to our estimates, reserves have crossed the landmark level of 3M imports of goods coverage (generally perceived as a minimum required level of reserves for an emerging market). The improvement was mainly driven by drastically lower imports, however (-36.6% y/y in Jul 2015 and -38.8% y/y in Jan-Jul 2015). Going forward, we uphold our current forecast of the central bank’s reserves finishing the year at USD 13.4bn, driven mainly by Ukraine prospective foreign debt flows. USD/UAH went back to 22 levels. The market was generally perceived to be balanced, though. The UAH may temporarily get under pressure these days, following today’s holiday in the USA (Labor Day) and a resultant dip in USD supply.
Money market: As banks stay rich in cash, NBU liquidity support dies out
As banking liquidity sticks to UAH 70bn levels, NBU liquidity injections have again come to zero (no inflows since Aug 21, except negligible UAH 24mn ON inflow on Aug 31). Implicit liquidity inflows have likely been rather sizable though, given UAH 2.1bn of OVDP redemptions last week (and which is to be supplemented by another UAH 1.9bn this week). Interest rates are largely unchanged with ON at 17/19%, 1 week at 18/20%, 1M at 20/23%, favoring our view on a very gradual softening implemented through the central bank’s rate cut on Aug 27.
Local debt market: Holiday season continued
Market activity stays low. Both FX OVDP and the VAT bonds see only bids, no offers. NBU continues to offer OVDP from its portfolio, with underlying yields kept unchanged (6M at 22.5%; 1Y at 20.5%; 3Y at 17%; 5Y at 15%; 10Y at 12%). The list was also replenished by the 8M maturity, which is currently offered at 20.75% YTM.
Global markets: President says no special treatment for Russian bonds
Ukraine’s President says no special treatment for Russian bonds. The statement was made this Sunday at a joint press-conference with IMF Head Lagarde in Kiev. The situation is getting all the more intriguing as Russian MinFin has recently reiterated its resolve to decline any restructuring of this loan (USD 3bn due Dec this year). As the ECB left rates unchanged, ECB President Draghi has explicitly said for the first time that the bank's bond-buying program may run beyond its end-date of Sep 2016, and that its size and composition might be adjusted. While the US Fed meets next week, expectations of a rate hike have waned due a slowdown in China. On top of that, US jobs data for Jul have also turned mixed, adding uncertainty on the central bank’s further policy steps.
For more information: UkrSibbank_070915.pdf