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UkrSibbank Researcht: UAH appreciation is done for now

February 20, 2018
We view both rapid devaluation of Ukrainian currency and subsequent strengthening in the first months of 2018 as excessive and transitory. The first was entirely driven by uneven budget payments, and the second is the result of a short-term carry trade speculative flows (non-resident investors buying in high UAH rates). As of today UAH has reached reasonable levels for 1H2018 in our view, and we continue to expect depreciation in Q4 2018 to levels 29.50.

Further appreciation pressure driven by hot money is possible, but clouded by volatility in financial markets. Following 350 b.p. hikes delivered by NBU, non-residents bought around UAH 6.9bn of local OVDP, effectively more than doubling their holding in a very short period of time (which now reached UAH 12.8bn). This has created strong appreciation pressure on hrynvia, provided low depth of FX market. And this might be far from over, from our perspective, as non-resident holdings of Ukraine local bonds are very low by international standards. At the same time we note that recent volatility in financial markets and subsequent decline in EM risk appetite might have decreased interest towards local markets for now. Apart from high UAH rates, another potential driver for UAH local debt inflows is opening possibility to trade UAH bonds via Clearstream (for now, cumbersome procedures of opening local account are required).

Current account deficit will expand significantly in 2H 2018, creating case of some devaluation towards year end. The main driver is acceleration of imports, driven by weak USD, rapidly rocketing imports of consumption goods, and energy price growth. This would require more aggressive inflows on financial account. While we price in two taps of international markets by Ministry of Finance and eventual bond placement of one quasi-soveregn, the stable inflows on financial account are subject to Ukraine-IMF deal. We are constructive, expecting one USD1.0-1.5 bn disbursement which would help to facilitate inflows on financial account. Also, this disbursement is needed to cover redemptions to IMF, which reach about USD 600mn per quarter.
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