March 24, 2014
This week in focus: Industrial production: more headwinds to come
Drop in industrial production slowed to 3.7% y/y last month, following a 5% contraction in January. In March, we expect the drop to slow further, hitting 3-3.5% y/y. We however believe the Q1 improvement to be temporary and think the IP growth outlook remains negative. This therefore makes us expect the industrial output to fall further on a y/y basis, showing at least 5% drop this year.
Currency market: Discussions of a memorandum on cooperation between Ukraine and IMF should be finalized this week, NBU says
UAH crawls down, in line with our expectations, hitting 10.8/11.0 by end Friday. At the same time, the volume of USD sales on the interbank market dropped materially, pointing to the lack of sellers. UAH is expected to stay under pressure until IMF program is in place or active steps are taken by NBU. Meanwhile, NBU says discussions of a memorandum on cooperation between Ukraine and IMF should be finalized this week, with a major part of the work to be completed by Wednesday, March 26. We expect the USD to roll back materially, should the outcome of the negotiations be positive (as reflected in a both sizable and quick bail-out package being agreed for Ukraine).
Money market: Deep freeze despite abundant liquidity
As banks continue to experience the outflow of deposits, NBU prints money in a bid to back up the faltering local banking system. Against this backdrop, balance of the correspondent account climbed to nearly UAH 29bn, complemented by UAH 5.8bn in outstanding NBU CD, virtually all of which are placed for the ON tenor. We still do not expect this to be reflected in lower money-market rates, however, given the persistent political and economic uncertainty, as well as increased concerns over the strength of the local banking system.
Local debt market: USD yields likely to edge down on IMF program
FX OVDP market remains limited to sellers. Supply continues to show steady growth and offer yields therefore grow up further, hovering at around 25% today (vs. 23% as of last Monday). UAH OVDP market stays inactive, with bid/offer yields at around 35/20%. While any positive outcome of the ongoing talks with IMF will likely send USD yields lower, we believe such drop will not be material, given substantially decreased FX liquidity position of local banks.
Global markets: Ukraine’s short-term risks re-priced
Ukraine’s yields moved down w/w, with such drop being especially pronounced on the shortest Ukraine-2014 (plummeting from 45% to 25%). Mid YTM on Ukraine-2015 fell from 20% to 15%, while the longest Ukraine-2023 slid from 11% to 10%. Short-term US bond yields jumped by the most in almost three years and US stock markets fell after US Fed said the central bank might end its bond-buying program this fall, and could start to raise interest rates around six months later.
For more information: UkrSibbank240314.pdf