Fixed Income Snapshot - UAH increasingly gets under pressure, watch progress in IMF talks

MM&FX: UAH increasingly gets under pressure, watch progress in IMF talks. Yesterday Ukrainian currency had its toughest day in many months. Cash exchange rates shot up to 7.80/7.88, while interbank finished just under 7.80. There are two reasons for such a sudden move in exchange rates – a) cheap money market and b) devaluation expectations which began to weigh on exchange rate.

Abundant liquidity spills to wider market, FX supply dries up. Money market was demonstrating very high liquidity and low interest rates since May and it took about one month for domestic banks to unfold lending to “A-Class” customers, overwhelming majority of which are exporters and have FX inflow either from sales or trade finance. Prevailing UAH 1M interest rate on a loan collateralized by foreign currency is 4% to 7%, while implied yields on 1M NDF range from 30% to 70%. Consequently, there is no sense to sell foreign currency on spot and that dries up supply even though Ukrainian exports are growing on the back of supportive external conjuncture.

Devaluation fears are on the rise, triggering exceptionally high FX demand from households. Domestic banks across the board reported demand for cash being the key driver of increased FX purchases yesterday. Still, some large orders from corporates are in cards as well. National bank massively intervened on Jul 1st, bringing the exchange rate down to 7.64. Central bank did not sell FX yesterday; that sparkled rumors regarding difficulties in Ukraine-IMF dialogue and further demand for FX.

We do not expect UAH to fall beyond 8.0-8.5 though. Central bank to take decisive actions, limiting extent of UAH weakness, especially as fundamentals (rising exports, positive 5M C/A balance do not support idea of substantially weaker local currency.

BANKING: State-owned Ukreximbank gets more support as the loan package arranged for it by EBRD was increased to $134.5 mn. $50 mn out of the sum would be granted by EBRD under 2-year tranche A. $84.5 bn would be provided by syndicate of banks in the form of B loan for 1 year. The rate is not disclosed, but it is rumored to be close to 8%. Earlier this year Ukreximbank received 10-year Tier-II subloan from EBRD.

The most part of B loan ($52 mn) is to be granted by initial MLA of the loan Standard Bank, Deutsche Pfandbriefbank and Calyon join the deal as MLAs with $15 mn and $10 mn commitments respectively. Citi, UniCredit Group\'s Bank Austria and HVB would also participate with smaller amounts. Previously Standard Bank had participated in loans to Ukrexim twice: in 2007 and 2008, both loans had 1 year tenor. EBRD emphasized on the importance of the transaction as it is the first market deal for a Ukrainian bank in the post-Lehman era.

Our view: the news is positive both for Ukreximbank and Ukrainian banking sector. We don’t set for a quick recovery of primary market though as that particular deal provides investors with preferred creditor status (PCS). Loans under PCS are not subject to moratoria, rescheduling or restrictions on convertibility or transferability of hard currency.