Ukraine Markets Daily (February 19, 2015)

Market news

  • Ukraine to ask UN to deploy a peacekeeping mission in the country 
  • Industrial production dropped by 21.3% y/y in January-2015
  • The NBU will introduce a new monetary policy

Market comment

The UX Index was up by 4.1% in UAH terms on Wednesday, and up by 1.5% in the US dollar terms, while the PFTS index was down by 1.0% in UAH terms. All ten companies in the UX index were up in the UAH terms with the largest decrease in prices observed for Enakievo MP 9.7%), Avdiivka coke (7.9%) and Azovsteel (7.7%). 

On the interbank exchange market, the USD/UAH spot rate was up by 2.7% with the closing price of 27.10 (mid price) on Wednesday, according to Bloomberg. The official exchange rate reported by the NBU was 26.80.

Ukraine 5-year CDS were up by 14.4% on Wednesday.


Ukraine to ask UN to deploy a peacekeeping mission in the country 

According to the statement of the Secretary of the National Security and Defense Council of Ukraine (NSDC) Oleksandr Turchinov, the NSDC supported the decision to appeal to the United Nations and the European Union on the deployment of a peacekeeping and security mission in Ukraine. He noted that this decision was motivated by the constant violations of the ceasefire and the withdrawal of heavy weapons by the pro-Russian militants and Russian regular army forces. Mr Turchinov also stated that peacekeepers should stand along the contact line and in uncontrolled areas along the Russian-Ukrainian border. 

It is also worth noting that yesterday the Ukrainian troops withdrew from Debaltsevo in the face of an overwhelming assault on the city from the pro-Russian militants. According to the statement of the Defence Ministry of Ukraine, during the last two days 22 Ukrainian soldiers were killed and another 150 injured. 

Our view:

We believe that the deployment of the UN Peacekeeping Mission along the contact line in Eastern Ukraine might increase the political pressure on the Russian Federation and Russia-backed militants to refrain from further attacks on the Ukrainian troops, thus improving the chances that the ceasefire will actually hold. However, it is not yet known if the UN’s decision will support the deployment of peacekeeping forces in Ukraine. Furthermore, in our view, the withdrawal of the Ukrainian troops from Debaltsevo allowed the Ukrainian military forces to smooth the frontlines and thus eliminate the possibility of creating “pockets” and suffering heavy losses as a result.


Industrial production dropped by 21.3% y/y in January-2015

According to the data released by the State Statistical Service of Ukraine, industrial production in Ukraine in January-2015 declined by 21.3% y/y and 19.7% m/m. Mining industry fell by 24.1% y/y, and processing industry – by 21.1% y/y. There were no industries at all, which were able to demonstrate even moderate growth. Two industries declined the less: extraction of oil and natural gas (-5.7% y/y), and pharmaceuticals (-7.8% y/y). The following industries declined the most: production of coke and products of oil processing (-54.1% y/y), coal mining (-51.9% y/y), and production of computers, electronic and optical products (-50.4% y/y). It is noteworthy that in January-2015 industrial production increased in the number of regions: Rivne (+10.3% y/y), Zakarpattya (+10.0% y/y), Lviv (+7.5% y/y), Chernivtsi (+3.1% y/y), and Sumy region (+1.5% y/y). Outsiders in industrial production in January-2015 were Luhansk (-87.0%) and Donetsk regions (-49.9%).

Our view:

The news is negative for the Ukrainian economy. The decline of industrial production in the Eastern regions indicated continued military tensions and unsustainable work of enterprises. At the same time growth of industrial production in some regions is a positive sign as the new center of economic growth in Ukraine will appear in these regions. We expect that the industrial production will recover when the situation in Eastern Ukraine calms down and international donors deliver funds for infrastructure reconstruction. Entering of UN peacekeeping contingent to the Eastern territories under control of pro-Russian terrorists may help in pursuing this goal.


The NBU will introduce a new monetary policy

Yesterday, the Head of the National Bank of Ukraine Valeriya Hontareva spoke in Ukrainian parliament and at investment conference. During her speech at Verkhovna Rada, Mrs. Hontareva stated that the National Bank would concentrate on the constraining consumer inflation in the middle term. In order to accomplish this goal in 2015, the NBU would introduce a new monetary policy, gradual removal of current administrative limitations at the foreign exchange market, and a creation of preconditions for introduction of inflation targeting. The NBU would use the volume of net international reserves, net internal assets, and monetary base as basic reference points.

Besides this, Mrs. Hontareva hopes that the foreign international reserves would reach USD 17 bn at the end of 2015 and claimed that currently the NBU doesn’t possess enough resources to make major influence on the foreign currency exchange rate. At the same time the NBU continued to spend foreign reserves for the state-owned Naftogaz support: USD 0.5 bn were spent in January, and USD 0.3 bn were spent up to the date in February. Nevertheless, market exchange rate formation mechanism is absent as there is a number of administrative limitations in the market. After the balance of payments stabilizes, the NBU will refuse the administrative regulation of the foreign currency market. In 2015, Mrs Hontareva expects that the deficit of current account would contract to 1% of GDP, and financial account would be positive. Net foreign direct investments would rise by 1-2% of GDP. The Head of the NBU mentioned that financial and capital account may get additional USD 5 bn due to possible re-profiling (extending of maturities) and restructuring of the state debt.

Our view:

The news is moderately negative for the Ukrainian Eurobonds. There is a clear hint that some kind of restructuring of the Ukrainian external debt is expected in the upcoming months. Besides this, the speech of Mrs Hontareva sounded over-optimistic concerning the forecasts of the volume of foreign reserves and stabilization of the balance of payments.



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