Ukraine Markets Daily (December 06, 2016)

Market news

  • Ukraine’s Foreign Reserves contracted by 1.6% mm in November

Market comment

The UX index was up by 0.4% on Friday, while the PFTS index increased by 0.1% (in UAH terms). The WIG-Ukraine index was up by 1.3%. On the interbank exchange market, the USD/UAH increased by 2.0% to UAH 26.05 (mid price), according to Bloomberg. The official exchange rate reported by the NBU was UAH 26.13.

 

Ukraine’s Foreign Reserves contracted by 1.6% mm in November

Ukraine’s foreign reserves contracted by 1.6% m/m in November, losing over USD 240 mn in a month, and amounted to USD 15.3 bn by December 1, 2016, according to NBU preliminary data. Therefore, reserves depletion is recorded the second month in a row, with the outflow accelerating from a 0.5% downswing in October. Increasing political tension has exerted pressure on the foreign currency market over the month, compelling the Central Bank to intervene to stabilize the surge in demand for foreign currency for citizens. The net use of foreign currency from the official reserve to level the fluctuation of the Hryvnia on the currency market amounted to USD 33.6 mn in November, according to NBU. A global strengthening of the US currency coupled with a downswing in gold price has also contributed to a depreciation of other foreign currencies, included in the reserve basket. And lastly, a portion of the official reserves worth USD 147 mn (including USD 94 mn payments on Eurobonds and foreign currency denominated government domestic bonds) has been used in debt servicing by the Government. The foreign currency outflow was only partly matched by net attraction of the National Bank through currency auctions on the interbank exchange market, and by an insignificant inflow of assistance to the Government from the EU in the volume of USD 60 mn. Despite, the favorable foreign market environment for Ukrainian grain and other exports, however, the overall volatility of the foreign currency market has restrained the ability of the National Bank to carry out foreign currency auctions on the interbank market in order to replenish the official reserves. As a result the NBU could run only six foreign currency auctions during the month, resulting in a net attraction of USD 80 mn into foreign reserves. As of end of November the foreign reserve volume matched an average of 3.6 months of imports, while fully covering the current liabilities and foreign currency operations of the Government and the National Bank, according to the report.

Our view:

The news is NEGATIVE showing the loss of foreign reserves to be accelerating, continuing the second month in a row, notwithstanding the relatively favorable foreign market environment for Ukrainian exports. We see the pressure on foreign reserves to remain high in December with regard to increasing demand for imports, including for energy input, and still escalating political risks. The delay in the disbursement of foreign assistance to the country, including IMF loan and EU assistance, on top of the latest news about a curtailing of the World Bank and EBRD project financing portfolio to the country, will exacerbate depreciation and inflation expectations too, adding pressure on the National Bank to use foreign reserves in order to stabilize the national currency.