Fixed Income Snapsshot - Ukraine sees another deflation month

BANKS: Central bank disclosed regular FX&MM statistics for August. Gross FX reserves stood at $28.9 bn (-2.4% m/m), implying that net reserves were very close to the floor stipulated by agreement with IMF. Funds, obtained from general SDR allocation on Aug 28th (See Snap “Ukraine will receive another $2bn as IMF moves to historic SDR allocation”) were not included to FX reserves this months, meaning FX reserves are to increase in September, boosting CB’s ability to defend local currency. Net FX purchases by population contracted in Aug. According to CB, individuals purchased $0.8 bn worth of FX, while in Jul this figure landed at $1.2 bn. It is interesting that NBU interventions balance in Aug and Jul also was -$0.9 bn and -$1.1 bn respectively.

Our view: It could be the case that central bank sells only that amount of FX which is needed to satisfy excessive demand from individuals. That could explain CB’s noninvolvement during latest FX trading sessions, when UAH lost some 6% of its value. Though, we are cautious regarding any projections of NBU’s policy over the next months (on the eve of election campaign).

Both narrow and broad money contracted in Aug, reflecting low business activity and continuous de-leveraging. Deposits in hryvnia fell by UAH 6.8 bn (-3.9% m/m) and deposits in FX rose equiv UAH 8.9 bn (+6.2%) as local currency was weakening over the last month. Households were the key driving force behind declining UAH deposits, removing ca. UAH 4.2 bn (or 4.2% of their holdings) during Aug. FX deposits by individuals rose some $0.4 bn, meaning one half of net FX purchases (see above) was put back to the banking system.

MACRO: IMF mission head in Ukraine Ceyla Pazarbasioglu told Reuters in an interview she did not see fundamental economic reasons (as trade balance is ok) for significant UAH devaluation. “Uncertainty about future policies”, making people to hedge themselves was named the main trigger for national currency weakening. During IMF mission visit details of budget 2010 were defined: 4% state budget deficit, which includes contributions to Naftogaz, and GDP forecast of 3%. C. Pazarbasioglu also said Naftogaz, which “is a huge strain on government finances”, needs to manage its debts well and collaboratively. Thus, there were no direct objections against NAFTO restructuring.

Our view: the recent interview should calm down talks arisen last week that IMF would ultimately halt cooperation with Ukraine until elections period is over. The Fund seems to be ready for dialogue, but Ukraine should fulfill obligations it has taken, including adjustment of internal energy prices. The necessity of this step was underlined by C. Pazarbasioglu and today local mass-media report that the ban on raising gas tariffs is a breach in conventions with EU on $1.7bn loan for Ukrainian gas sector.

Prices for foodstuffs became the main driver of CPI -0.2% mom decline (vs UkrSib fcast of -0.1%) in August. The key upside driver was 2.5% growth in transport prices, caused by 8.7% hike in gasoline cost. The prices for foodstuff and non-alcoholic beverages decreased by 1.2%, being dragged by significant drop in prices for fruits&vegs. In yoy terms CPI inched down to 15.3%.

PPI posted 1.8% m/m hike, led by rebound in steel&ore and sugar prices. All industries across the board saw price increase except for gas, water and electricity production. In yoy terms PPI is still in the negative territory (-3.7%).