April 08, 2014
This week in focus: Reserves down to USD 15.1bn, weaker UAH starts to tell on current account
NBU reserves lowered by 0.3bn in March, driven by relatively low FX repayments, no FX interventions as UAH has been in a free float, and no payments to Russia for the gas imported in February. In April, reserves will come under more pressure, given USD 645mn repayment to IMF, plus another USD 100mn in other FX debt payments. The situation gets all the more difficult as last week Russia raised its gas price for Ukraine to USD 485 per thousand cm. Meanwhile, lower UAH rate started to pass through, as current account deficit plummeted to USD 121mn in February (vs. USD 1.5bn in February 2013).
Currency market: UAH at record low while NBU holds on to FX rate flexibility
Local currency remains on the downpath, having slid to its record low (11.65 per USD) by end Friday and touching 12 during yesterday’s trades. With the implementation of the 0.5% fee on FX purchases last Tuesday, market activity has shown a notable decrease on the back of low volume of imports into Ukraine, the fact that the FX was likely overbought heavily in February expected roll-back of the USD after IMF disbursement. While the policymakers show their commitment to FX rate flexibility, the immediate background for the UAH remains negative, in our view.
Money market: Tensions in the East to drive deposits, liquidity out of banks
Total local currency liquidity finally broke through UAH 40bn on Friday, despite a seemingly lower volume of stimulus from NBU last week. Of this, as of end Friday, UAH 7.7bn were held in overnight NBU CD. As tensions in the eastern regions aggravate (and will likely continue to aggravate as the presidential elections approach), retail deposits (both UAH- and FX-denominated) will keep showing negative growth rate, in our view, thus pushing liquidity down. At the same time, we believe the NBU will continue to uphold banks, doing everything it can to prevent a liquidity crunch and a subsequent spike in interest rates. With that, the health of the local banking system remains a primary issue.
Local debt market: VAT bonds on agenda
Last week Finance Minister Shlapak said the government plans to issue VAT bonds within three weeks. The timing looks somewhat ambitious, as policymakers still need to come up with an issuance procedure. While the bonds will have a 5Y maturity (as provided through the recent amendments to the state budget law 2014), other parameters, such as the coupon rate and the repayment schedule, have not yet been set out. Meanwhile, an 8% coupon rate has been mulled. According to the finance minister, the approximate volume of the issue will be UAH 16bn. Today the government will offer 4M USD bonds (obviously seeking to raise more USD ahead of USD 0.6bn payment to IMF on Apr 30). Other offerings include 3M and 6M UAH notes.
Global markets: Yields on Ukraine’s Eurobonds move up as tensions in the East grow
Moody's cut its rating of Ukraine's government debt to Caa3 (neg outlook), while USA approved USD 1bn in loan guarantees to Ukraine. YTM on Ukraine-2014 moved from 16.6% on end Monday to 18.4% on yesterday's afternoon, pushed by another string of concerns over a Russian invasion, pushed yields up last week, as well as the uprisings in three eastern regions over the weekend. EUR has been under pressure from expectations the ECB may undertake a program of asset purchases this year to support the economy.
For more information: UkrSibbank080414.pdf