ukraine macro presentation commerz
TRANSCRIPT
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7/31/2019 Ukraine Macro Presentation Commerz
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EM Research | October 2011
Macroeconomic OutlookUkraine
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1EM Research | October 2011
Ukraine macroeconomic overviewKey points
Ukraine is gradually recovering from the 2008 crisis, although it carries a high degree of vulnerability to external demand andcommodity prices. Its output is still below the level in 2007 as opposed to CIS peers.
GDP growth is estimated to have grown by 5.3% in Q1, slowed to 3.8% in Q2 and rebounded in H2 on a strong harvest.Growth could reach 4.5% this year and slow considerably in 2012 on global demand. Higher social expenses and stateinvestments are expected to give short-term support to domestic demand in H2 2011.
Rising imports and a likely deterioration of Ukraines terms of trade - defined as steel export versus energy import prices -pose a risk to Ukraines current account balance. It stood at 2.8% of GDP in August YTD and may reach 6% in 2012 in casethe current gas contract applies. These increased exchange rate risks due to Ukraines external financing constraints.
NBU reserves dropped from $38.2bn to $35bn in September and without unblocking the IMF loans Ukraines external liquiditywould weaken further next year. The next IMF mission is due in Oct/Nov. Deputy PM Tigipko is proposing full programcompliance to avoid having to look eye-to-eye with another crisis. The freezing of capital markets for Ukraine limit thegovernments loan options.
Ukraines fiscal position has improved and default is not a threat at present. The Jan-Aug. state budget balance is -0.4% of
GDP. With 2.4% GDP cash reserves the Treasury has already pre-financed Ukraine's net borrowing need for the year. Thegross issuance is, however, being increasingly monetised. Next years domestic budget (re-)financing may require higherNBU purchases. External debt service may require the use of FX reserves.
UAH one-year NDF yield reached UAH 10 against the USD or nearly 30%. (compared to 8.5 in mid-summer). Domesticgovernment bond yields rose to 14% - 17% on one-year to four-year bonds and newly issued USD-indexed three-year UAHbonds 8.2%. The market challenge highlights the importance of Ukraines IMF program.
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2EM Research | October 2011
Ukraines economic recovery has underperformed CIS peers..Ukraines economic output still below pre-crisisReal GDP level 2007=100
Source: IMF, Commerzbank estimates
-25
-20
-15
-10
-5
0
5
10
15
20
2007 2008 2009 2010 2011 E
%
Net exports
Investment
ConsumptionReal GDP growth
The inventory cycle has been driving growthPrivate consumption is taking over, while net exportcontribution is negative.Weaker external demand should be partially offset by highersocial expenses and state investments next year.
GDP growth has been growing at an annualised pace of c. 4% y/y.The global growth outlook made us revise Ukraines growth forecastlower to 4.5% this year. It is likely to slow considerably in 2012.
85
90
95
100
105
110
115
120
2008 2009 2010 2011
KazakhstanTurkeyRussiaUkraine
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3EM Research | October 2011
.. but has gained momentum by h1 2011
Credit to private sector % y/yUkraines credit markets are still impaired, but credit intermediationhas resumed and domestic demand has been strengthening
Industrial production, 3mma % y/yUkraines industry posted 9% growth in H1 2011, led by manufacturing.The metallurgy sector has posted double-digit growth but could start toface headwinds from the global economy.
Source: Ecowin, National Central Banks, Commerzbank estimates
-20
0
20
40
60
80
100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Kazakhstan Ukraine Russia
-35
-25
-15
-5
5
15
25
Mar -0 7 S ep- 07 M ar-08 Sep -0 8 Mar- 09 S ep- 09 M ar -10 Se p- 10 Mar- 11
yoy (%) UkraineRussiaKazakhstan
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4EM Research | October 2011
Foreign trade
Commodity structure of exports
Export structure by destination (% share)
Chemicals7%
Minerals13%
Agriculture8%Other
28%
Machinery11%
Base metals33%
30.8 31.8
25.1
7.05.3
36.5
26.9 26.7
5.93.9
0
5
10
1520
25
30
35
40
CIS Europe Asia Africa America
2005 2010
Exports, imports and trade balanceUkraine remains exposed to commodity price risks. Trade exposure toAsia could soften the export shock in case European demand falls.
-80
-60
-40
-20
0
20
40
60
80
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11
%
-12.0
-7.0
-2.0
3.0
8.0
Trade balance 6mma rhs, U$ bnImports 6mma % y/y lhsExports 6mma % y/y lhs
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
1 Q - 9
2
1 Q - 9
3
1 Q - 9
4
1 Q - 9
5
1 Q - 9
6
1 Q - 9
7
1 Q - 9
8
1 Q - 9
9
1 Q - 0
0
1 Q - 0
1
1 Q - 0
2
1 Q - 0
3
1 Q - 0
4
1 Q - 0
5
1 Q - 0
6
1 Q - 0
7
1 Q - 0
8
1 Q - 0
9
1 Q - 1
0
1 Q - 1
1
Ukraines export market share in world imports
Source: Ecowin, National Central Banks, Commerzbank estimates
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5EM Research | October 2011
Commodity trade balances in Europe
Source: CEIC, UN Comtrade, Commerzbank Corporates & Markets
Net export/import(-) of key commodities, % GDP Net export/import(-) of energy, % GDP
-10 -5 0 5 10 15 20 25 30
Kazakhstan
Russia
Ukraine
South Africa
Bulgaria
Poland
Romania
Czech Republic
Hungary
Turkey
-12 -8 -4 0 4 8 12 16 20
Kazakhstan
Russia
Romania
Poland
Turkey
Bulgaria
Hungary
South Africa
Czech Republic
Ukraine
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6EM Research | October 2011
Ukraines terms of trade
Gas prices by Gazprom
Minister of Economy Kliuyev stated that the 2012 budget is based on $415 gas price, calculated according to the supply contract. Thiswould widen Ukraines energy trade deficit by $2.2bn. An additional 10% decline in steel prices would add $2bn deficit. A combinedterms of trade impact would be around $4.2bn or 2.5% of GDP (*base case).
If oil declines by 30% and Ukraine buys the fixed contract amount (33bcm) at c. $352, and steel prices drop by 10%, the net tradeimpact is c. $2bn (1.1% of GDP). A new gas deal with Russia is in the pipeline..
Trade balance and energy imports
At *base case terms of trade projection
264
295
355
455
372
0 100 200 300 400 500
Ukraine 3Q 2011no discount
TTF current spotprice
Ukraine actual 3Q
2011
Belarus 3Q 2011
Ukraine 2Q 2011
Belarus 2Q 2011
Ukraine 1Q 2011
Belarus 1Q 2011
Average Europe
TTF spot average
U$-25
-20
-15
-10
-5
0
5
10
15
20
25
2007 2008 2009 2010 2011(jan-June)
2011 F 2012 F U $ b n
Energy import Trade balanc e Energy trade balance
Source: Ecowin, National Central Banks, Commerzbank estimates
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7EM Research | October 2011
The steel sector challenge
The steel sectors net margin could fall below its level during the 2009 crisis in case of the combined terms of trade impact of10% weaker steel demand/prices and unchanged gas contract. This highlights the importance of a gas new gas deal.
Steel output strong in h1, terms of trade turning Steel trade margin as % of GDP(steel exports net of energy imports)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2005 2006 2007 2008 2009 2010 2011 F 2012 F-60
-40
-20
0
20
40
60
80
Jan-04
Oct-04
Jul-05
Apr-06
Jan-07
Oct-07
Jul-08
Apr-09
Jan-10
Oct-10
Jul-11
Steel output % y/y
Source: Ecowin, Commerzbank estimates
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8EM Research | October 2011
The gas sector challenge
Ukraine is one of the least energy-efficient countries worldwideand highly dependent on imported gas.
Investment in exploration, extraction and transportation isinsufficient, domestic production is below potential. Gas transitthrough Ukraine is at risk due to deteriorating gas networks
Transit revenues amount to c. $2bn
Reforms initiated under the IMF program include (i) graduallybringing domestic gas prices to import-parity (suspended), (ii)liberalisation of the gas sector and unbundling of Naftogaz;adopting separate cost centres for gas imports, domestic gasproduction and gas transit, (3) modernisation of the gas transitinfrastructure.
Gazprom has pushed for closer working relations with Naftogaz:President Yanukovych offered Russia a share in Ukraine's gastransit network. A consortium with Russian participation would beset up to manage Ukraine's pipelines. According to Russiangovernment sources, Ukraine would receive 20% of shares in theconsortium. Another 20% will be held by one German companyand the rest by Gazprom.
Gas extracted domestically could be exported to Europe to offsetthe losses on high import gas price if those remain as per the gascontract this year and next.
25%
46%
107% 107%
100%
0
50
100
150
200
250
300
350
400
Households Utilitycompanies
Budgetaryinstitutions
Industries Import pr ice0%
20%
40%
60%
80%
100%
120%% of import price, rhs
Price U$, lhs
Domestic gas prices well below import-parity
Source: Commerzbank estimates
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9EM Research | October 2011
The structural challenge
Productivity levelGDP per person employed
World Bank doing business ranking
Economic reforms slowly advance; (i) the pension reform will come into force on 1 October 2011, (ii) land reform and a free landmarket could be established next year, (iii) the restructuring of the gas sector is likely to gather momentum. Additionalprivatisation in the energy distribution is being tendered ($300m).Fiscal stabilisation has made substantial progress, while structural weaknesses remain:
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
I n d i a
C h i n a
U k r a i n e
B r a z i
l
W o r
l d
R u s s i a
A z e r b a i
j a n
T u r k e y
G e r m a n y
H o n g
K o n g ,
C h i n a
U n i
t e d S t a t e s
c o n s
t a n t
1 9 9 0 P P P $
145
127
123
79
68
65
59
54
22
5
2
1
0 50 100 150
Ukraine
Brazil
Russia
China
Belarus
Turkey
Kazakhstan
Azerbaijan
Germany
United States
Hong Kong, China
Singapore
Source: World Bank
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10EM Research | October 2011
Fiscal consolidation in progressGeneral Govt balance (% of GDP)Fiscal stabilisation has advanced vs. other IMF program countriesUkraine targets 2.6% of GDP deficit (+0.8% Naftogaz) vs. 6.5% in2010. The 2012 draft budget is conservative despite the 2012elections at -2.5% of GDP. Fiscal conservatism has been atrademark of the Azarov government. Government reservesamount to 2.4% GDP.
General government budget balanceThe fiscal deficit has shrunk to 1.1% of GDP by Aug 2011 (12mrolling) vs. 2.8% under the revised budget due to 40% nominalincrease in revenues. (The 8m deficit is $0.6bn or 0.4%). Therevised 3.4% fiscal target could accommodate a wider-than-budgeted Naftogaz deficit (0.8% GDP) and may facilitateunblocking the IMF loans.
Source: Ecowin, IMF
-9
-7
-5
-3
-1
1
3
L a t v i a
P o l a n
d
U k r a i n e
L i t h u a n i a
C r o a t
i a
S e r
b i a
C z e c h
R .
H u n g a r y
R u s s i a
T u r k e y
K a z a k
h s t a n
20102011
-20
-10
0
10
20
30
40
50
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11
% y/y
-80
-70
-60
-50
-40
-30
-20
-10
0
10
U A H b n
Gen. govt. budget balance 12mma rhsExpenditures % y/y, lhsRevenues lhs
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11EM Research | October 2011
Domestic UAH sovereign debt market
-60,000
-50,000
-40,000
-30,000
-20,000
-10,000
-
10,000Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
UAH mn
Pro-rata budget (revised, 2.6% GDP)2011
20102009
0
5
10
15
20
25
J a n -
0 9
M a r - 0
9
M a y - 0
9
J u l - 0 9
S e p - 0
9
N o v - 0
9
J a n -
1 0
M a r - 1
0
M a y - 1
0
J u l - 1 0
S e p - 1
0
N o v - 1
0
J a n -
1 1
M a r - 1
1
M a y - 1
1
J u l - 1 1
%
-
20,000
40,000
60,000
80,000
100,000
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
NBU Banks Others Non-residents
20,000
10,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Central Bank net claim on c entral govt.Treasury deposits at the NBU (budget pre-financing)NBU holding of govt. securities
Budget execution vs. pro-rata budget target Govt. reserves and net position vs. NBU (UAH m)
Government bond holdings by sectors (UAH m) Avg. yield at UAH treasury auctions
Source: Ecowin, NBU
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12EM Research | October 2011
The public debt serviceDoable with maturity extension of IMF liabilities, higher domestic yields
Debt redemptions cluster at the end of the year in2011 and rise significantly next year.
Foreign debt service, including a partialredemption of the $2bn VTB loan this year, wouldamount to nearly $2bn.
Including IMF liabilities ($4bn) Ukraines externaldebt service is $5.5bn in 2012 and may requirethe use of international reserves.
Ukraines external liquidity benchmarks wouldweaken.
Ukraines short-term domestic debt is large; it hasto refinance UAH 30bn in 2012. The NBU hasstarted to monetise UAH debt and may need toincrease its purchases next year whenredemptions increase.
In the short term, the yield that stabilisesUkraines debt is below 14%. Over the long term
at standard assumptions Ukraines debt ratio isset to decline.
Co-operation with Russia in the gas sector,unblocking of IMF loans and maturity extensionof fund liabilities could relieve external balancepressures in the near term.
Source: Commerzbank, Bloomberg, Global Source, IMF
Total government debt maturities
Source: IMF, Bloomberg, NBU Commerzbank estimates
1 , 2 7 6
1 , 2 0 0
1 , 3 0 0
5
4 , 5 4 3
4 , 8 2 3
1 , 9 8 3
0
1 , 2 3 4
5
1 , 6 3 9
5 , 7 4 6
3 , 0 1 2
2 , 5 0 0
4 , 6 6 8
5
3 , 6 6 0
3 , 5 6 0
2 , 1 4 3
5 2 5
3 3
2 , 1 4 7 2 , 5
9 0
2 , 7
5 3
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
O c t - 1
1
N o v - 1
1
D e c - 1
1
J a n -
1 2
F e b - 1 2
M a r - 1
2
A p r - 1
2
M a y - 1
2
J u n -
1 2
J u l - 1 2
A u g - 1
2
S e p - 1
2
O c t - 1
2
N o v - 1
2
D e c - 1
2
J a n -
1 3
F e b - 1 3
M a r - 1
3
A p r - 1
3
M a y - 1
3
J u n -
1 3
J u l - 1 3
A u g - 1
3
S e p - 1
3
U A H m n
-
2,000
4,000
6,000
8,000
10,000
12,000
2011 2012 2013 2014 2015 2016 2017 2018 2019
U $ m n
Other (VTB loan, Naftogaz, Ukrexim)
Projected repayments to the Fund
Domestic UAH bonds
International Bonds
Domestic debt maturities by month (as at Sep 2011)
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13EM Research | October 2011
External balance
A moderate crawling devaluation is conceivable under a negative external balance scenario
Ukraines current account position is under market watch due to itsfinancing constraints.Under the fixed gas contract terms and weaker steel demand/pricesthe current account deficit could widen to $10bn or 6% of GDP. (Apessimistic scenario).
Capital flows: a fragile balance as IMF loans stalled
Source: Ecowin, Commerzbank
-15
-10
-5
-
5
10
15
20
25
1Q-06 4Q-06 3Q-07 2Q-08 1Q-09 4Q-09 3Q-10 2Q-11
U $ b n
Capital and fin. a/c balance 4Q cum.
Current acc. balance 4Q cum.
Balance of payments deteriorating
Ukraines capital balance is supported by Eurobond issues andinter-governmental loans (also privatisation this year). Withoutwholesale funding channels Ukraine may need to cover a BOPshortfall from reserves next year.
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
1Q-06 4Q-06 3Q-07 2Q-08 1Q-09 4Q-09 3Q-10 2Q-11
m ln U$ Other c apital, loans and bonds
Portfolio investment, net
Direct investment, net
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External liquidity may weaken
In the assumed negative balance of payments outcome..External debt as % of GDP External debt as % of exports
Gross reserves in months of imports Short-term debt as % of gross reserves
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012
Gross reserves (mon ths of next year's imports)
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011 2012
Short term debt as % of gross reserves
0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012 2013 2014
Total external debt % of GDP
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011 2012 2013
External debt to exports %
Source: IMF, Ecowin
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The market challenge..
MSCI indices, 2008 jan.=100Ukraines relative performance in line with Russias
Sovereign CDS spreads (bps)at 850bps Ukraines spread is second widest after Greece
0
20
40
60
80
100
120
140
1 / 2 8 / 2 0 0 8
4 / 2 8 / 2 0 0 8
7 / 2 8 / 2 0 0 8
1 0 / 2 8 / 2 0 0 8
1 / 2 8 / 2 0 0 9
4 / 2 8 / 2 0 0 9
7 / 2 8 / 2 0 0 9
1 0 / 2 8 / 2 0 0 9
1 / 2 8 / 2 0 1 0
4 / 2 8 / 2 0 1 0
7 / 2 8 / 2 0 1 0
1 0 / 2 8 / 2 0 1 0
1 / 2 8 / 2 0 1 1
4 / 2 8 / 2 0 1 1
7 / 2 8 / 2 0 1 1
MSCI RU MSCI EM PFTS Ukraine
0
1000
2000
3000
4000
5000
6000
1 / 2 8 / 2 0 0 8
4 / 2 8 / 2 0 0 8
7 / 2 8 / 2 0 0 8
1 0 / 2 8 / 2 0 0 8
1 / 2 8 / 2 0 0 9
4 / 2 8 / 2 0 0 9
7 / 2 8 / 2 0 0 9
1 0 / 2 8 / 2 0 0 9
1 / 2 8 / 2 0 1 0
4 / 2 8 / 2 0 1 0
7 / 2 8 / 2 0 1 0
1 0 / 2 8 / 2 0 1 0
1 / 2 8 / 2 0 1 1
4 / 2 8 / 2 0 1 1
7 / 2 8 / 2 0 1 1
0
200
400
600
800
1000
1200Ukraine lhs Greece lhs Hungary
Poland Russia Italy
Source: Ecowin, Bloomberg
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16EM Research | October 2011
Financial sector vulnerabilities
Short-term debt and FX liabilities are high, particularly when considering BOP and FX risks
FX loans as % of total loansForeign currency loans as % of GDP
Short-term debt burden
0
50
100
150
200
250
T u r k e y
R u s s i a
C r o a t
i a
R o m a n
i a
H u n g a r y
K a z a k
h s t a n
L i t h u a n i a
E s t o n
i a
U k r a i n e
L a t v i a
Loan/deposit ratio
0
10
20
30
40
50
60
70
80
90
B e l a r u s
R u s s i a
T u r k e y
M o l
d o v a
P o l a n
d
M a c e d o n
i a
R o m a n
i a
A l b a n
i a
U k r a i n e
S e r
b i a
H u n g a r y
B u l g a r i a
L i t h u a n i a
C r o a t
i a
L a t v i a
0
102030
405060708090
100
B e l a r u s
R u s s i a
T u r k e y
P o l a n
d
M o l
d o v a
U k r a i n e
M a c e d o n
i a
B u l g a r i a
R o m a n
i a
H u n g a r y
A l b a n
i a
S e r
b i a
L i t h u a n i a
C r o a t
i a
L a t v i a
Foreing currency loans to households
Foreign currency loans to corporatesIndexed
05
10152025
3035
404550
R u s s i a
K a z a k
h s t a n
T u r
k e y
S e r
b i a
B e l a r u s
P o l a n
d
M a c e d o n
i a
U k r a i n e
C r o a t
i a
B u l g a r i a
H u n g a r y
0
50
100
150
200
250
300ST external debt at remaining maturity, % GDP lhsST external debt at remaining maturity, % GIR, rhs
Source: Ecowin, IMF, Fitch Ratings
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