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UKRAINIAN MONEY & FX MARKETS
Balance of payments deficit widens in August.
The National Bank of Ukraine published its preliminary estimate for the balance of payments in August'09. The current account deficit stood at USD 44m, and the financial account deficit amounted to USD 2.6bln. August’s balance of payments figures are in line with our expectations. Foreign trade was still in the red in August, with the trade deficit at USD 142m. There were no loan disbursements from the IMF in August, so the financial account gap that month corresponds to both statistical methodologies (for more detail on BoP methodology with regard to IMF financing, see Astrum Daily of September 23).
The financial account deficit in August was associated with three key factors. First, there were net public sector debt redemptions of USD 525m, formed by the Ukraine-09 Eurobonds payment. Second, net retail purchases of foreign currency stood at USD 554m. Third, Ukrainian commercial banks redeemed short-term (less than 1 year) debt for USD 894m. The accumulated 8M09 current account deficit amounted to USD 1.1bln, and the 8M09 financial account deficit amounted to USD 3.6bln (USD 9.7bln excluding the IMF loan). We maintain our forecast for the current account deficit in 2009 at USD 0.5bln (0.4% of GDP) and for a financial account deficit of USD 5.9bln (4.9% of GDP). The growth of the deficit sends a signal about the possibility that pressure on the hryvnia will grow in 4Q09.
Real wages down, consumer lack confidence
According to the State Statistics Committee, the average wage in August stood at UAH 1,919. Thus, nominal wages decreased by 4.4% m/m, but grew 2.5% y/y. In real terms, wages fell by 11.3% y/y in August and 10.3% y/y in 8M09. The m/m decline in wages in August was associated with seasonal factors, attributed primarily to the education and agricultural sectors. We maintain our forecast that the real average annual wage will decline by 10% y/y in 2009.
At the same time, according to a joint survey carried out by GfK Ukraine and the International Centre for Policy Studies (ICPS), the Consumer Confidence Index (CCI) grew by 6 points m/m to reach 63.2 in August’09. We associate this improvement mostly with the good harvest (the city/village breakdown for the CCI has not been published yet). Most of the improvement in the CCI was associated with the Index of Current Standing (ICS), which gauges Ukrainians’ self-evaluation of their current well-being. It surged by 11.5 points m/m to reach 54.1. At the same time, the Index of Economic Expectations (IEE) grew by a modest 2.4 points m/m to reach 69.4. Strong pessimism still prevails on the Ukrainian market as indexes range from 0 to 200, where 0 means ideal pessimism and 200 is related to ideal optimism. Expectations about prices and employment remain negative: 19 out of 20 Ukrainians expect that price growth will accelerate in the next 12 months and 15 out of 20 expect that unemployment will rise in a year’s time. Thus, the level of Ukrainians’ confidence in the economy remains low and this, in our view, should spread to affect even the Ukrainian national currency, creating the preconditions for further devaluation.
UKRAINIAN EUROBONDS
Naftogaz publishes restructuring proposal
Naftogaz finally published the proposal for the restructuring of its Eurobonds. The terms were agreed with the Ukrainian government and offer extension of the issue by an additional five years, a 9.5% coupon rate, and a government guarantee. These details were leaked to the press a few weeks ago and came as no surprise to the market. The key factor was the publication of the terms itself, which have been long awaited by investors. We consider the restructuring terms to be moderately positive. Naftogaz is to redeem 100% of the issue with a circulation period of five years, which is in line with our expectations. Despite the fact that the Cabinet of Ministers authorized the provision of an “absolute guarantee” for the restructured Naftogaz’s Eurobonds, we think that these Eurobonds should trade at a premium to the sovereign yield curve. In the past, the government has repeatedly said that it would provide support to Naftogaz in redeeming its debts, but that did not prevent Naftogaz from trying to restructure the Eurobond issue. Thus, investors’ confidence in any kind of guarantee regarding Naftogaz’s debt restructuring, even in the case that the guarantee is based on state Budget provisions, has significantly decreased. We think that the fair spread to the sovereign curve should be at 200 b.p. At the same time, lessened tension in the Ukrainian Eurobond segment due to the conclusion of the saga on Naftogaz’s restructuring should lead to an increase in the value of sovereign bonds, pushing Naftogaz’s Eurobonds’ yields lower, and narrowing the spread to sovereign bonds.
Despite the fact that Naftogaz has begun negotiations with investors and that it has published its restructuring proposal, we expect that the Company will not reach a final agreement with bondholders in the time that remains before the redemption date. According to the restructuring proposal, the bondholders meeting should take place on October 19, 2009. As a result, in the case that Naftogaz does not reach a stand-still agreement with bondholders, it will have to declare default. We have no evidence that a stand-still agreement was offered to bondholders and our base scenario is that Naftogaz will default on its Eurobonds. At the same time, we expect that the restructuring will be successfully carried out as scheduled.
Ukrainian Eurobond segment is recovering
Despite the difficult situation on foreign markets, the value of Ukrainian debt increased last week and the EMBI+ Ukraine index spread narrowed by 35 b.p. to 872 points. As we have repeatedly stated, Ukraine Eurobond spreads are unjustifiably wide in connection with the situation surrounding Naftogaz Eurobonds, and the publication of the restructuring conditions has finally reduced uncertainty. Next week does not look promising for the Ukrainian Eurobond segment though. The potential for the further narrowing of spreads may, at first, remain unfulfilled against the negative information background regarding Naftogaz’s formal default. At the same time, we recommend investors to HOLD Ukrainian bonds, as we expect their quotations to grow on the back of the completion of Naftogaz restructuring.
Among sovereign securities, we find the most attractive at this moment to be short issues. The yield for Ukraine-11 remains above 11% p.a. and this Eurobond was one of few in the sovereign and quasi-sovereign segment whose quotations did not grow last week. In line with our expectations, Ukreximbank Eurobonds demonstrated positive dynamics. Against the background of the successful redemption of Ukreximbank-09 bonds, the yield for Ukreximbank-11 fell by 1.8 p.p. to 12.8%, though the potential for growth remains. Bonds issued by the City of Kyiv, for redemption in 2011, continue to enjoy growth. The spread of Kyiv-11 to the sovereign remains attractive, but we do not recommend investors to hold this paper in their portfolio to maturity and suggest instead focusing on short-term trading profits. Among bank issues, Pivdenniy Eurobonds showed the best performance, the yield for which fell by 7 p.p. to 17.9% by the end of the week. For corporate issues, Interpipe Eurobonds saw the best performance. Its yield declined by 10 p.p. to 46.6%.
UKRAINIAN DOMESTIC BONDS
MinFin increased volume of OVGZ placement
On Tuesday, September 22, the Ministry of Finance placed OVGZ for a total amount of UAH 409m, offering government bonds with a maturity period of 6 months, 12 months and 19 months. The volume of the placed bonds increased by 227% compared to the previous auction. Both the volume of the placed bonds and the demand exceeded our expectations. The total volume of bids stood at UAH 743m, which is 53% higher than in the previous auction. MinFin satisfied 24 of the 39 applications submitted. The threshold level for bond yields remained the same – 22% for 6-month and 9-month bonds, and 23% for bonds on the long end of the curve. The main demand was focused on the short end of the curve, as was also the case last week. As a result, the share of 6-month bonds in the overall volume of the OVGZ placement was 64%. We think that demand increased due to the growth of liquidity in the banking system. At the time of the previous auction, banking system liquidity was at its lowest in the past month, at UAH 14.3bln, which lead to a significant limitation in terms of demand for OVGZ. At the time of the last auction, liquidity had grown to UAH 16.6bln. This week, the government will be holding its next OVGZ placement, offering government bonds with a maturity period of 9 months, 12 months and 3 years.
Treasury bonds become available on retail market
On September 23, the government began to place its new debt instrument – domestic state debt bonds, which are for sale to the public. The term of the bond’s circulation is 1 year, the coupon yield is 16% p.a. We do not expect that the new instrument will have an impact on the Ukrainian debt market. In our view, the demand for these bonds will be extremely low, and the government cannot place a significant amount of these bonds without taking specific administrative measures. The yield being offered for these bonds is significantly lower than the interest rates currently being offered for deposits at reliable banks, and this debt instrument is completely new for the population. Moreover, devaluation risks make investments in UAH-denominated fixed income securities extremely unattractive to the public at the moment.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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