Weekly review: Govt faces sizable redemptions this week, seeks 9% coupon on new USD bond

The financial markets started this week riding a wave of optimism that a deal with Greece would be struck late Monday (20 February), following weeks of lengthy consultations among many sides involved and public unrest in Greece that a positive decision is within close reach. Back home in Ukraine, there is guarded optimism among some government officials about the successful launching of a new sovereign bond issue with a maximum coupon of 9%.

Local currency. Trade flow statistics in December 2011 and on FX reserves in January 2012, which was published last week, was not helpful to investor sentiment towards the UAH. A still-sizable trade deficit was reported, as well as FX reserves declining, as the NBU was selling USD to support the UAH. Meanwhile, the exchange rate for the local currency found support last week, not least thanks to the quarterly corporate tax payments, and the NBU did not feel compelled to intervene. The trade-weighted value of the hryvnia was rather stable, as FX markets globally awaited resolution of the Greek bailout issue, and global financial markets, with the exception of Hong Kong, rose yesterday on expectations that such a resolution will eventually be finalised. If this expectation materialises, investors could expect an additional rally in the EM FX and euro versus the US dollar. Hence, the USD may be broadly under downward pressure in the near term. Thus, the UAH, being pegged to USD, could also be under pressure, albeit in trade-weighted terms. This means, however, slightly better external competitiveness on the part of the economy, bodes well for the export-oriented industrial sector. Hence, local authorities\' FX policy aimed at a stable nominal rate could last more weeks and months. Otherwise, if a Greece deal is derailed, then FX markets could turn bearish toward EM FX and flee for the safety of the US dollar, lifting the UAH\'s trade-weighted value along the way. This would also bring forward the issue of a USD/UAH correction.

Domestic bond market. Banking sector liquidity was stable last week, but it will fall significantly this week after the quarterly tax payments and purchases of newly issued local-currency bonds. The main inflow in liquidity will be from the debt repayments scheduled for this Wednesday amounting to UAH3.4bn. The MoF, which likely expects difficulties with the implementation of the new borrowings plan, last week announced issuances of retail bonds and the new auction schedule for March, 2012. Possibly in anticipation of the MoF\'s expected debt problems this year, the City of Odessa currently does not have funds for the BNP Paribas\' loan redemption amounting to CHF40.0m due at the end of this year.

Eurobond market. Ukrainian Eurobonds\' YTMs were at their usual level last week. At the start of the week, YTMs were mostly above 10.0%, and by the end of the week, YTMs slightly declined, but the MoF will not force the situation by making new Eurobonds issues, and announced the ceiling for the interest rate for the new issues at 9.0%. As a result, we expect that the MoF will not issue new Eurobonds before the first sign that Greece\'s debt problems have passed, and that Greece will repay its debt scheduled for this March.

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