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UKRAINIAN MONEY & FX MARKETS
Hryvnia breaks out of its freefall
Last week, the NBU started to hold auctions to sell US dollars, which have shown positive results within the first few days after application. Banks should submit their applications indicating their desired exchange rate and volume, but no less than USD 10,000, and the purpose for buying the foreign currency. Each bank is permitted to submit only one bid application per day. All banks have access to the auctions, which is advantageous compared to the NBU’s previous interventions. As a result, the selling rate for currency at the auction has a maximum impact on the market and succeeds in minimizing the speculative component, which often dominated previous FX interventions implemented by the NBU. As a result, the hryvnia finished the week at UAH/USD 8.55, 4.5% up over the previous week.
We do not expect that the NBU will manage bring the rate below UAH/USD 8.0 by using of this new intervention method. In our view, the best policy for containing the exchange rate would be to send the message to the market that the NBU will not give up on this idea and to enter the market with rather significant volumes whenever devaluation outbreaks happen. As experience from Tuesday and Wednesday last week has shown, this can prompt massive sell-off of foreign currency by market players, effectively bringing the exchange rate down.
IMF publishes second review of Ukraine stand-by program
The International Monetary Fund has published documents related to the second review of the stand-by program, which preceded the provision of the third USD 3.3bln loan tranche to Ukraine. Among the performance criteria, only fiscal ones were reviewed, while all other requirements remained unchanged. The fiscal deficit for 2009 was increased from UAH 40bln to UAH55bln, and this figure does not include any bonds to be issued for Naftogaz’s recapitalization. In addition, the Naftogaz deficit in 2009 is stated at UAH 24.1bln. The government and the IMF also agreed on a new macroeconomic forecast for Ukraine. Real GDP is expected to decline by 14% in 2009, compared to the previous estimate of 8%, and to grow 3% in 2010. Expected CPI growth in 2009 was reduced from 16% to just 13% Dec/Dec. The government and the IMF expect that Ukraine will have current account surplus in 2009, at 0.5% of GDP.
New GDP forecasts for Ukraine are generally in line with Astrum’s forecasts. However, we do not expect CPI growth to decline so significantly and expect a 16.5% Dec/Dec increase in consumer prices in 2009. Moreover, we expect a deficit in the current account at 0.4% of GDP vs. the Memorandum’s estimate of a 0.5% of GDP surplus. Most of the new Memorandum’s “checkpoints” are scheduled for the end of September’09. We do not expect that the government will manage to meet all the commitments by that date. It has already breached the gas price hike provision that was actually an “advance pre-requisite” for receiving the previous tranche. We continue to expect that the fourth IMF tranche will be postponed until 2010.
Government publishes preliminary parameters for 2010 state budget
The Ministry of Economy has published key figures of its macroeconomic forecast for 2010, which will become the basis for the draft 2010 state budget, to be approved this week by the government. The Ministry expects that real GDP will grow 3.7% in 2010, with nominal GDP reaching UAH 1,179bln. CPI growth in 2010 is forecast at 9.7% Dec/Dec. According to the Ministry, industrial output should grow 2.9%. At the same time, exports are forecast to increase by 9.5% and imports by 6.3%. The Ministry of Finance intends to borrow UAH 120.4bln in 2010, including UAH 104.9bln domestically and 15.5bln from external sources.
The general real GDP growth figure is more or less in line with our forecast of 3% economic growth in 2010. In following with tradition for the government, the 2010 inflation estimate is set at a one-digit 9.7% Dec/Dec. However, we are sceptical about this figure and expect that CPI growth will speed up to 20% Dec/Dec in 2010 due to extensive residential utility tariff reviews, the economy’s recovery, and other factors, . Actually, the 9.7% Dec/Dec CPI growth does not correspond with the government’s nominal GDP estimate for 2010 and thus, we see this forecast as one that is somewhat biased towards the budget, in order to make a case for less expenditure indexation and increased planned fiscal revenues. We believe that the government is considering Eurobonds as one of the funding sources to cover the budget deficit, and we expect that the state will enter the debt market in 2H10 to borrow USD 0.5-1bln.
UKRAINIAN EUROBONDS
Hard days for Ukrainian debt market
The Ukrainian Eurobons segment once again confirmed its sensitivity to negative news. After a selling frenzy on Wednesday and Thursday, the yields for most sovereigns returned to their end-of-July level, with the yield curve becoming inverted. As a result, the spread for the EMBI+ Ukraine index grew to 1,048 points on Thursday evening. On Friday, the cost of the Ukrainian debt corrected, and the spread dropped by 91 points to 957 points in just one day. As a result, the widening of the spread for the week totalled 116 points (14%).
There was a reduction in the price of all bonds in the sovereign and quasi-sovereign segment. The yields of sovereign bonds grew 1.0%-1.9%. Following confident growth, Kyiv City’s Eurobonds maturing in 2011 underwent a serious correction, with the yield reaching 22.7%, the yield of Kyiv-12 reached 19%. With very few exceptions, the corporate segment also demonstrated significant growth in yields. Last week, the most volatile Eurobond was Ukrsotsbank-10, with a yield of 20%. Alfa Bank (Ukraine) Eurobonds moved contrary to the general tendencies – in line with our expectations, Alfa Bank’s yield declined by 2.3 p.p. to 19.5% by the week’s end, as did Pivdenny and Azovstal Eurobonds.
The main factor that led to the market’s collapse was significant media coverage about difficulties in Ukraine-IMF relations and continued uncertainty over the restructuring of Naftogaz’s Eurobonds. In our opinion, there were no fundamental reasons for the current drop in the value of Ukrainian debt and this drop was mainly due to the generally low overall awareness of most investors about the situation in Ukraine. Thus, we see now as an ideal opportunity for purchasing Ukrainian Eurobonds. Sovereigns should grow upon the publication of the restructuring terms for Naftogaz Eurobonds, which should remove such uncertainties. At the same time, the redemption of Eurobonds worth USD 768m, denominated in Swiss francs on September 15, should again dispel the myth of the insolvency of Ukraine's foreign debt.
In our opinion, Ukrsotsbank-10, Ukreximbank-11 number among the most attractive corporate Eurobonds on the market today, as well as Kyiv Eurobonds. Pryvatbank-12 also offer significant growth potential.
Official restructuring proposal from Naftogaz pending.
At the time of this review, Naftogaz has not yet issued a proposal for the restructuring of its Eurobonds, and unease on the market persisted. In the meantime, news agencies have already published the tentative terms of the restructuring that would entail 100% repayment of the debt with a five-year period. The coupon yield is set at 9.5%, while bondholders would also be granted additional guarantees. The terms appear to be moderately positive, but we are refraining from their evaluation prior to the publication of the formal proposal, which should disclose detailed information and, primarily, details concerning state guarantees. In our view, investor confidence in any kind of guarantee is currently at a low level. The other terms of the restructuring, including the circulation period and the coupon yield, are very closely in line with our expectations. In our view, the spread of Naftogaz Eurobonds to the sovereign curve should reach 300-500 b.p., and we expect a decrease??? in the price of these Eurobonds by up to five points once the terms of restructuring are announced. At the same time, we recommend that investors do not take any action before the official terms of restructuring are actually published.
UKRAINIAN DOMESTIC BONDS
MinFin increases volume of OVGZ placement and chooses four more primary dealers
At the auction on Monday, September 7, the Ministry of Finance placed government bonds for the total amount of UAH 445m. The market was offered OVGZ with a maturity period of 6 months, 12 months and 2 years. The government retained the yield level unchanged, while managing to attract 220% more funds than in the previous placement. It is noteworthy that the number of applications increased to 46. Demand was concentrated at both the long and short ends of the curve. A total of 17 bids were made for bonds with a 2-year circulation period, for an overall value of UAH 426m, with only seven of them being satisfied in the amount of UAH 90m. Thus, despite the potentially high demand, the volume of long OVGZs actually purchased is still low. The yield spread in bids for these government bonds was more than 10 p.p., ranging from 21% to 35% p.a. Short OVGZs with a 6-month circulation period were placed in the amount of UAH 275m, which accounted for more than 50% of the total volume of OVGZ sold at the auction.
We believe the auction’s results are not in line with current market logic. The reduction in the market’s desirable yields occurred despite sharp hryvnia devaluation and the fact that the banking system’s liquidity has recently been squeezed. We believe this market compromise is due to an uneven distribution of liquidity among banks, and the desire of some banks to become listed among the primary OVGZ dealers, which makes them more loyal to MinFin’s requests. The next few auctions should demonstrate whether the market will continue to be willing to buy OVGZ with lower yields. We maintain our view that the current macroeconomic situation is not inclined towards a reduction in yields for OVGZ.
This week, the Ministry of Finance has fully developed the necessary list of banks as primary dealers to move to a new form of auction for OVGZ placements. The selection of another four dealers makes viable a new system of primary auctions, where only the applications of primary dealers will be satisfied. Primary dealers make daily quotations on government securities, submit applications for purchases during OVGZ placements, and ensure the purchase of OVGZ in an amount not less than 3% of their placement during the course of six months. The date of commencement of the new auction scheme still has not been announced, but we believe that it can happen within the next month.
In its second tender to select OVGZ dealers, the Ministry of Finance chose Rodovid Bank, UniCredit Bank, OTP Bank and Erste Bank as primary dealers. As a result, the number of OVGZ dealers has reached nine. Previously, MinFin chose following five banks as primary dealers: ING Bank Ukraine, UkrSibbank, Oschadbank, Ukrgasbank, and Raiffeisen Bank Aval. The list of primary dealers may be expanded once again in three months’ time, when MinFin carries out the next stage of selection.
Ukrgasbank restructures 75% of its domestic bonds
According to reports published by the mass media, Ukrgasbank has agreed to restructure 75% of its domestic bonds. The Bank currently has five bond series in circulation for a total value of UAH 650m. According to the agreements concluded, Ukrgasbank will immediately pay out 20% of bonds’ face value presented at the scheduled put option, with the remainder to be restructured over a period of three years. Six months after the initial payment, Ukrgasbank will redeem 9% of the remaining bonds, with the remainder to be redeemed within the next year and a half in equal installments of 9% each in the last year. In the final year, quarterly payments will be made at 6%, 6%, 2%, and 2.5%. We expect that the remaining bondholders will be forced to accept the terms of the bond’s restructuring.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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