Ukraine Markets Daily (March 22, 2017)

Market news

  • Ukraine’s GDP grew by 2.3% in 2016
  • Ukrlandfarming and Avangard started negotiations on their Eurobonds due in 2018

Market comment

The UX index decreased by 0.4% Yesterday while the PFTS index remained unchanged. The WIG-Ukraine index was down by 0.6%. On the interbank exchange market, the USD/UAH remained unchanged at UAH 26.86 (mid price), according to Thompson Reuters. The official exchange rate reported by the NBU was UAH 26.89


Ukraine’s GDP grew by 2.3% in 2016

Ukraine’s GDP grew by 2.3% in 2016, emerging from a downfall of 9.8% in 2015, and amounted to UAH 2383.2 bn (USD 75 bn), according to the State Statistics Service. GDP per capita stood at UAH 55848 (USD 2054), according to the report. A strong 40.8% increase in investment above all drove economic growth in 2016. Investments in fixed capital grew by 20.1% y/y to UAH 323 bn (USD 12 bn). Meanwhile, final consumption increased by 1.4% to UAH 1733 bn (USD 64 bn), nurtured by 1.8% expansion in household’s consumption to UAH 1340 bn (USD 49 bn). A Further contraction of exportation by 1.6% to UAH 1029 bn (USD 38 bn) against a strong 8.4% increase in importations to UAH 1174 bn (USD 43 bn) exacerbated the negative contribution of foreign trade in economic growth. Along economic sectors, agriculture (5.9%), domestic trade (4%), manufacturing (5.6%), construction (16.3), and real estate operations (4.2%) above all contributed to GDP growth. Meanwhile, on March 20, 2017, the NBU has updated its country forecast for 2017-2018 with consideration to the exacerbation of the eastern Ukrainian conflict, especially after the introduction of the ban on trade with the disputed areas of Donetsk and Luhansk regions. The Central Bank estimates that the manufacturing sectors of metallurgy, mining, coke production, and electricity generation above all will endure the negative impact of the trade standoff. Nevertheless, the production loss will be partially mitigated by favorable global prices for Ukraine’s major export items (metals, iron ore, grain), the NBU maintains. NBU expects that the deterioration of the balance of payments ensuing from the trade ban should not impact upon the Hryvnia’s exchange rate, though negatively affecting foreign reserves dynamics. The current account balance is expected to lose up to USD 1.8 bn and amount to USD 4.3 bn (compared with a January forecast of USD 3.4 bn), prompting among other to revise the projections on foreign reserves down to USD 20.8 bn (vs. USD 21.3 bn in January) in 2017 and to USD 25.9 bn in 2018 (USD 27.1 bn). As a result of the development, the NBU revised its economic outlook for 2017 down to 1.9%, compared with an expectation of 2.8% annual economic growth in January before the introduction of the ban. In the meantime, the Central Bank estimates that the country’s economy will be able to overcome the impact of the Donbas losses in 2018, which allows anticipating a stronger growth of 3.2% in 2018 (3.0% in January). The eastern Ukrainian development should not substantially impact upon consumer prices, the regulator maintains, therefore allowing keeping the inflation projection at 9.1% in 2017, and 6.0% in 2018

Our view:

The 2016 economic results exceeded the expectations, benefitting above all from strong agricultural results, the resumption of some economic linkages with the disputed areas of Donbas, as well as from robust investments in postwar infrastructure rehabilitation, on backdrop of supportive global price environment for Ukrainian exports. We expect the latest government decision toward the upgrade of households’ income to add to final consumption in 2017, while investment will benefit from the strong government emphasis on infrastructure development. In the meantime the current exacerbation of the eastern Ukrainian conflict, together with persisting geopolitical tensions, will continue dragging net exports down


Ukrlandfarming and Avangard started negotiations on their Eurobonds due in 2018

On March 21, 2017, UkrLandFarming PLC (“ULF”) and Avangardco Investments Public Limited (“AVG”) informed that the companies, together with their advisor, Latham & Watkins LLP, are discussing with an ad hoc committee of bondholders and its advisors, Hogan Lovells International LLP and Ernst & Young, a proposal in respect of ULF‘s USD 500 mn 10.875% Notes due 2018 and AVG’s USD 200 mn 10.0% Notes due 2018. The Committee represents approximately 40% of the ULF Notes and approximately 50% of the AVG Notes, according to the statement, while the proposal is expected to be presented to all the note holders shortly. The companies consider a restructuring of the interest payment due under the ULF notes on March 27, 2017, through postponing of the payment by one month, using the 30 business day grace period set forth in the Terms & Conditions of the ULF Notes

Our view:

The news is NEGATIVE, supposing increased liquidity pressure on Ukrlandfarming and Avangard with regard to the recently imposed restrictions on Ukraine’s poultry and poultry product exports on the major markets of Europe and the Middle East, together with the persisting financial pressure on the companies’ major shareholder Oleg Bakhmatyuk from the side of the National Bank of Ukraine. We think that the month-long delay should allow clarifying the final financial results of the company for the previous year, and preparing a more comprehensive proposal related to the companies’ debt servicing issues. We concede that under the current development the companies may consider a larger scale reprofiling of their debt, inter alias requiring a maturity extension by three-to-five years, with a possibility to consolidate the two Eurobond issues into one. Additionally, we do not exclude that the companies’ shareholder revives the debt-to-equity schema, considered during past debt negotiations.