29 March 2011

Ukraine Current Situation

Timothy Ash - Global Head of Emerging Markets Research - Royal Bank of Scotland

Ukraine | Trip notes

We visited Kiev on March 17- 18, meeting with officials from the Ministry of Finance, the State Statistical Committee, the IMF, alongside local banks and members of the diplomatic community. The NBU failed to respond to requests for a meeting.

Summary view: Political stability appears relatively assured, with the Regions of Ukraine (RU) administration enjoying a solid parliamentary majority, and control over the presidency, parliament and executive. The administration seems to be making solid progress on an IMF-reform agenda, and we expect this to ensure the release of the latest credit tranche of USD1.6bn in April/May. Reforms are, however, proving controversial (e.g. pension reform, hiking the retirement age) and the government has seen its popularity fall. The administration may want to get difficult reforms out of the way this year, clearing the path for parliamentary elections in October 2012. The ruling coalition thus far continues to take advantage of the fact that the opposition is in disarray. Perhaps the biggest risk on the political/economic front appears to come from relations with Russia, as Moscow has threatened to close borders if Ukraine signs up to a Free Trade Agreement with the EU. This may just be a negotiating ploy to secure access to assets in Ukraine. Economic growth seems to be picking up steam, helped by the strength in metals prices. Inflation has moderated, and while the trade/current account deficits look set to widen, they remain financeable, and the UAH looks set to remain stable. Budget trends generally remain encouraging with the 2011 deficit target appearing attainable. The public sector debt service schedule also appears manageable, helped by the UAH10.6bn raised from the sale of Ukrtelekom and recent success in borrowing from the domestic/external market. The sovereign is expected to tap the Eurobond market again before year end. We expect further outperformance by Ukrainian sovereign debt. We would also recommend exposure to UAH-denominated debt, un-hedged, albeit the problem herein is the lack of liquidity.

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