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Quarterly Report - Keep the music playing (eng)

31.01.2013 | Источник: ICU
Тема: Макроэкономика, стратегии, прогнозы, ICU, Инвестиционный Капитал Украина

ICU's macroeconomic view on Ukraine in the forecasted three-year period of 2013-15 is summarised in the following viewpoints:

Cornered, and with limited room for manoeuvre. Ukraine finds itself backed into a corner by quite serious economic and fiscal deterioration due to a mix of external and internal factors. The economy is now officially in a double-dip recession as of 4Q12. With prospects for growth anaemic (our base-case forecast for 2013 is 1.7% YoY, while meaningful growth is not expected until 2014), financing needs for this year are daunting in the face of out-of-control external debt. Authorities are caught in the crossfire between the demands of key external lenders like the IMF and Kremlin, and deteriorating, domestic economic conditions. With the country's sovereign credit rating a notch away from the default area, prospects for a further worsening of government debt metrics put Ukraine's government at risk of being denied access status to private lenders. Hence, current talks with the IMF on financial assistance are key to our base-case macroeconomic scenario.

IMF is key in relieving the sovereign external burden in 2013-14. We devoted a great deal of attention to the issue of Ukrainian authorities' (of the government, central bank, and state-run entities) external obligations burden, which is set to increase in the 2013-14, if there is no agreement with either the IMF or the Kremlin. Pending agreements with both the IMF and the Kremlin hold the key to relieving this issue . Our analysis yields the conclusion that a certain deal with the IMF in early 2013 is the most likely (60% probability) of all the options we observed. Hence, again, an IMF deal this year is an integral part of our base-case scenario, and we explain why in detail in this report (see "Geopolitics: IMF, Kremlin, or going it alone" on pp.11 and "Assessment of sovereign external obligations' burden in 2013-14" on pp.55).

The combination of recession, deflation, and rising debt could be a Molotov cocktail for the economy, if not deactivated. In our view, the survival instinct of the authorities is prompting them to deactivate a macroeconomic cocktail of recession, deflation, and increased government financing requirements, all of which may take place on the doorstep of 2013. The currently unfolding decline in domestic interest rates, a pro-growth event, is a reflection of the reduced risk premium the market attaches to the UAH. A likely IMF-induced energy tariff increase will spur inflation to 5%, a healthy level, and add momentum to GDP growth in nominal terms, a positive event for sovereign credit metrics. All in all, a quick deal with the IMF is a final step in turning around the economy. If Ukraine's authorities fail to engineer all of the above, then a worst-case scenario could unfold, giving rise to talks of a sovereign debt restructuring.

In the external balance, two issues loom large: the trade deficit and payouts to the IMF. Despite few positive trends observed in foreign trade such as the growing diversification of exports among steel, food, and engineering (see "External balance: The changing face of foreign trade", pp.34), the country's foreign trade is set to remain in heavy deficit, as imports of costly hydrocarbons are weighing it down. Our base-case scenario envisages that Ukraine imports 33bcm a year of natural gas in the next three years, although Naftogaz's portion of imports will be maintained at 25bcm in order to cut sovereign fiscal costs and FX reserves spending, a task which has been undertaken by Ukraine's authorities to help Naftogaz's imports (see "Naftogaz: Cutting back the deficit", pp.29). Our base-case scenario is for the yearly average import price on natural gas in 2013 at US$404 per 1,000 m3, and then moving up to US$405 in 2014, followed by a reduction to US$399 in 2015. All in all, this results in a still-sizable current account deficit, which is set to diminish over 2013-15, from 7.1% of GDP this year to 5.7% in 2014 and 4.2% of GDP in 2015. Together with external debt payouts, the economy's external financing requirements also on the rise. In 2013-14, the debt owed to the IMF looms large, with US$5.9bn of principal repayments due in 2013, US$3.7bn in 2014, and US$1.3bn in 2015. With the IMF financing received this year and borrowings from complimentary resources, Ukraine's FX reserves are set to rise by US$3.8bn, and this will bring the imports coverage ratio up from 2.9x last December to 3.3x at year-end 2013. See more in "Balance of payments assessment for the 2013-15 period", pp.40.

Hryvnia: Recession and current account deficit spell weaker currency. As a deal with the IMF is on horizon, the prospects for the UAH in the next six-month and nine-month periods are to become weaker than the current spot of 8.14/USD, as the above-mentioned factors such as recession and a 7% current account deficit are likely for 2013. However, in our view, the authorities would resist a sizable devaluation of the UAH due to, primarily, the high fiscal cost it would create. (The quote at the top of this section epitomises this approach.) Hence, we argue that in 2013, the UAH weakens to 8.75/USD by year-end (8.58/USD yearly average), then slides further, to 8.71/USD as a yearly average in 2014. An average rate of 8.63/USD forecasted for 2015 is going be in line with ICU's trade-weighted valuations of the hryvnia. For more details, please see "View on UAH: Internal devaluation since 2H12" on pp.43.

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