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Ukraine CA deficit grows in October
The National Bank of Ukraine (NBU) has announced preliminary figures witnessing that the CA deficit grew to USD 1.9 bln in October as compared to USD 0.9 bln in September. Overall, the CA deficit reached USD 10.5 bln (negative 6.5% of GDP) in January-October 2008.
The merchandise balance deficit in October grew to USD 1.7 bln as exports dropped to USD 5.7 bln (USD 642 mln lower than in September, representing a 10.1% MoM decline) and imports dropped to USD 7.4 bln (USD 1 bln lower than in September; a 11.9% decline MoM). Therefore, the merchandise balance deficit in January¬October 2008 reached USD 13.9 bln.
Over a half of the total export volumes was supplied by agricultural exports (mainly grain exports). Exports of ferrous metals continued to fall in October (negative 20.5% to September 2008; 35.6% to October 2007); machinery exports fell 20% MoM. Chemical production exports fell 19.4% MoM.
The deficit of financial and capital account in October has reached USD 2.1 bln; the first negative balance since January 2008 (negative USD 0.5 bln) and a record low since January 2007, when monthly statistics began being recorded. FDI inflow in October was USD 0.4 bln, a record low in 2008 and 2.2 times lower than the average 2007¬2008 monthly indicator. The positive FDI inflow (USD 0.4 bln) and borrowings balance (USD 0.7 bln) was not enough to overweight the increase of the foreign currency holding in the economy (USD 2.5 bln) in addition to the small negative balance in other categories.
The double deficit has been financed by the foreign reserves of the NBU, which fell by USD 4 bln in October 2008 and reached USD 31.9 bln (4.1 months of imports), a nine¬month record low.
Our view:
We view the continuous contraction of the CA balance as an outcome of the global economic downturn.
On the trade balance side, economic decline in Europe and worldwide has caused declining demand for ferrous metals – the main export article of Ukraine – as well as chemical exports. In addition, the anticipation of economic slowdown in Russia and the NIS is causing a drop in demand for Ukrainian machinery output.
On the financial and capital account side, we observe an outflow of speculative capital from Ukrainian assets, coupled with pessimistic expectations regarding the Ukrainian currency’s devaluation, curbing demand for Ukrainian currency.
We see foreign reserves’ decline in October as a result of the NBU’s interventions on the foreign exchange Interbank market. Yet we anticipate that the reserves will somewhat stabilize in November due to the first USD 4.5 bln tranche of the USD 16.4 bln IMF standby loan being received in early November. However, we anticipate that most of the credit was spent on supporting the UAH, which will result in an almost unchanged reserves level in November.
Overall, we anticipate that CA dynamics in 2009 will be influenced by a number of factors. Firstly, the continuing global economic crisis will stimulate demand for commodities (mainly steel) and goods produced in Ukraine, curbing the Ukrainian exports. Secondly, the anticipated increase in unemployment and economic recession in Ukraine will cause a drop in demand for imported goods in 2009. Thirdly, the devaluing UAH will provide support to Ukrainian exporters and will make domestic goods more competitive in comparison to imported substitutes, thus strengthening the trade balance. Finally, the continuing lack of liquidity abroad and uncertainty regarding the UAH’s strength will continue to cause small volumes of FDI inflows, coupled with a stimulated foreign currency demand, causing a negative or insignificant financial and capital account balance.
Previously, in light of the upcoming recession, Sokrat has put its CA forecast for the next year under revision.
Ukrsotsbank Issues January-September Results: POSITIVE
Ukrsotsbank [USCB UZ, U/R] has issued its report on the banks activities for the first nine months of 2008 in accordance with Ukrainian accounting standards. The bank increased its net assets by 24.1% in January¬September 2008, establishing the value of net assets at UAH 38.753 bln (UAH 6.61 / USD 1).
For the period January¬September 2008, the bank`s total credit portfolio has also grown by 34.8% to a total of UAH 32.584 bln. This amount includes including UAH 17.29 billion of loans to individuals, compared to the UAH UAH 15.294 bln loaned to enterprises.
Since the beginning of 2008, retail deposits rose 3% to UAH 7.681 bln, while corporate deposits totaled UAH 7.633 bln.
For the same period, the bank more than doubled its net profit to UAH 502 mln.
Ukrsotsbank`s capital amounted to UAH 3.699 bln at the end of September, having risen 15.8% since January 1, 2008.
Ukrsotsbank is a Kyiv¬based commercial bank that is one of the largest in Ukraine, with a network of 485 branches and departments with a staff of over 10,000 persons. It is a subsidiary of Italy`s UniCredit Group [UCG MSE, N/R], which acquired 94.2% stake in the Ukrainian bank on January 23, 2008 through its unit Bank Austria AG.
Our view:
This news is POSITIVE for Ukrsotsbank. We believe that Ukrsotsbank will continue its own development in Ukraine; however the speed of development will slow down due to the global economic crisis. We hold a skeptical view on the bank’s credit portfolio growth and expect decreasing retail deposits volume in the Q42008.
It is significant that, these days, Ukrainian banks with foreign capital are enjoying their status as the affiliates of international banking structures. As Sokrat mentioned in previous daily reports, not only Ukrsotsbank, but also a number of other banks with foreign capital (i.e. Alfa Bank, Raiffeisen Bank Aval, and OTP Bank) have recently received funding from their parent structures, which increases their liquidity and shows confidence on the part of the parent structures about the prospects of their respective affiliates.
Fitch Affirms Neg Outlook for Ukraine Electricity: NEGATIVE
Difficulties in financing the needed investment into the Ukrainian electricity sector and the high level of depreciation of its assets are the key reasons behind Fitch’s negative outlook on the sector. Anton Kravchenko, Fitch’s electricity specialist, made a corresponding statement at a recent conference in Kyiv. He remarked that low electricity tariffs and state ownership of almost all the electricity generators, along with Ukrainian budget issues and the global economic crisis, signify that currently the situation in Ukrainian electricity sector is unlikely to change for the better.
Our view:
We support Fitch’s view on the Ukrainian electricity sector with the only exception being that even in the worst¬case scenario of zero investment into the Ukrainian electricity sector, the low utilization level of Ukrainian thermal and hydro generators and the drop in electricity consumption due to the economic slump would add to the resilience of the sector in the mid¬term. Although the 2009 investment program into the electricity sector, worth UAH 15 bln, was announced by the Energy Ministry last week, its full implementation without rather heavy financing from abroad through vast privatization is unfeasible.
Electricity Consumption Slumps Alongside Economy: NEGATIVE
According to the state wholesale electricity operator “Energorynok”, from November 10 through November 16, 2008, electricity consumption in Ukraine slumped 13.2% YoY, from 24.6 GW per week for this period in November 2007 to 21.4 GW per week in November 2008.
The worst performers were the Dnipropetrovsk (¬39.6% YoY) and Zaporizhzhia (¬27.9% YoY) Regions, with huge ferroalloy and aluminum producers stopping their output. The industrialized Donetsk and Lugansk Regions lost 16.4% YoY and 15.5% YoY, respectively, in terms of electricity consumption. The Cherkasy Region took fifth place, declining ¬15.3% YoY, and the Poltava Region lost 11.9% in electricity consumption YoY in the second week of November.
The agrarian South and West Ukrainian regions were less hurt by the drop in electricity consumption while Chernivtsi even gained 13.9% of electricity consumption YoY.
Our view:
The figures are convincing. As the economic crisis continues to develop, electricity consumption will continue to fall and electricity companies will be showing weaker financials. But every cloud has a silver lining. Hopefully this crisis will push Ukrainian authorities to speed up the needed reforms in the electricity sector.
Myronivskyi Khloboprodukt to Suspend Investments: NEUTRAL
Myronivskyi Khliboprodukt [MHPC LI, U/R], a vertically integrated company consisting of 20 enterprises, is one of the biggest companies in terms of land bank under lease. Last Friday, Viktoria Kapeliushnaia, the company’s finance manager, made an official press release, in which she stated that MHP is suspending investments into unprofitable projects and cutting some administrative expenses due to the ongoing economic crisis. Moreover, the manager noted that the terms of implementation for the construction of a meat processing complex in the Vinnytsia Region have not been defined in terms and requires some consideration. However, she emphasized that MHP is not going to reduce sales of its products via its franchising network.
The revenues of Myronivskiy Khliboprodukt (MHP) increased at 35% CAGR over the period 2005¬2007. The company’s EBITDA margin in 2007 amounted to 34.3%, which is considerably higher than the average 12% EBITDA margin of developed market’s peers.
Our view:
The financial liquidity crunch, in synergy with the hryvnia’s devaluation, will naturally affect MHP, which has loans in foreign currencies that are due in 2009 and whose main revenue stream comes from the domestic market. Moreover, we retain our positive view on the company, as MHP has a strong well¬known brand (Nasha Ryaba) and a firm position on the domestic poultry market. The company is benefiting from vertical integration, which allows it to save on operational margins and helps with quality control at all stages of product processing. Moreover, we expect the growing demand for poultry on the domestic market on the back of decreasing real disposable incomes and changing consumer preferences towards cheaper poultry meat.
We believe that the company will finish all ongoing projects and will postpone commencing long¬terms projects until better times. Moreover, as an agricultural producer, MHP is eligible for government subsidies from the Ukrainian Government.
Ukrtelecom to Double Rates for Mobile Operators: POSITIVE
The Open Joint¬Stock Company ‘Ukrtelecom’ [UTEL UZ, U/R] has proposed that mobile network operators adhere to the new rates for accessing its fixed¬line network. Namely, Ukrtelecom is imposing a two¬fold increase in this rate, from 0.25 kopecks to 0.50 kopecks per minute. This is considered to be symmetrical with the growth rates for traffic utilized by the mobile operators, according to the news source ProUA.com. Such a change can trigger recovery rates throughout the entire market and end¬tariffs for consumers, which would quite adversely affect the development of small and medium operators.
“We have proposed to establish balanced rates of access. So just as we are paying them, they should also pay them. That’s the truth,” stated Igor Syrotenko, Deputy Chairman of the Board for Ukrtelecom. He noted that the rate changes are expected to take effect as of the end of the current Interconnect agreements with operators, which are usually for a period of one year.
In terms of concrete figures, Ukrtelecom achieved revenues of UAH 372.6 mln in 2007 for services used to connect mobile operators’ traffic to its network totaled.
According to the online information portal ‘i’, Ukrtelecom initially planned to offer operators to establish this balance – not by raising their rates, but by lowering the rates that mobile network operators charge Ukrtelecom for accessing their networks to the same rates being charged by Ukrtelecom., “But this means that they must show their shareholders a reduction in revenues, which is difficult to justify. If Ukrtelecom proceeded to raise rates to the level charged by mobile operators, then they simply will have to react to this,” stated one reliable source quoted by ‘i’.
At present, Ukrtelecom – the country’s fixed¬line incumbent – controls 78.5% of the fixed line telecommunications market in Ukraine and has more than 10.1 mln clients.
Our view:
This news is POSITIVE for Ukrtelecom. In our view, this move will improve the company’s profitability. Keeping in mind that revenue received from termination call fee brought Ukrtelecom growth of about 4.7% in 2007, we also positively view the growth of company revenues from this segment but only beginning in 2009.
92.79% of the OJSC Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.
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