yanukovich warns of a new vote

Reuters

Ukrainian President Viktor Yanukovich said Friday he would call a snap parliamentary election if a court ruled that the creation of the ruling coalition broke constitutional rules.

Parliament amended the rules on forming coalitions earlier this month, paving the way for the new government of Prime Minister Mykola Azarov -- a close ally of Yanukovich who was elected to the top post last month.

Former Prime Minister Yulia Tymoshenko, a bitter rival of Yanukovich in the presidential election, had called the amendment a "constitutional coup d'etat."

"If the decision of the Constitutional Court will be that the coalition was formed illegally, then I will take a decision on a snap election," Yanukovich told a delegation from the European Parliament.

"I will never go down the path of breaching the constitution that is in force."

Yanukovich said the Constitutional Court had already begun reviewing the case. It was unclear when it could issue a ruling. On urgent matters the court rules within weeks but on matters deemed less urgent it can take months or even longer. ...

Shadow economy as a % of official GDP of Ukraine

“Guess NBU rate” game

During last days, the Ukrainian FX market continued to be guided by the NBU. National Bank of Ukraine changed its behavior and begun to enter the market at the end of the day instead of the morning. Thus, market players are now playing the game “let’s guess what the NBU’s intervention rate for today will be”, experts of Astrum Investment Management say.

They maintain their view that the NBU will not go far with its exchange rate adjustments, as it continues to pursue its de facto fixed exchange rate policy.

At the same time, the NBU will need to show some degree of “fluctuations” to the IMF, as the Fund does not favor a fixed rate policy. Thus, further “cosmetic” exchange rate adjustments are possible. During the last week, the hryvnia gained less than 0.2% against the dollar.

Ukraine mistakenly put itself into FATF “black list”

On Friday, 19th of March, hundreds of Ukrainian news sources reported that Ukraine Financial Action Task Force (FATF) has put the country into list of states that have serious deficiencies in their strategies for countering money laundering and terrorism financing.

This fact shows how far is Ukraine from the outer world. The initial information on list of problematic countries was released by FATF took place a month before, on 18th of February. Ukraine WAS NOT in the black list. The country was mentioned as one that made significant progress in fulfilling FATF recommendations.

It is important that this list is NOT the synonym of FATF “black list”. The latter term usually refers to countries which it perceives to be non-cooperative in the global fight against money laundering and terrorist financing. It is divided into three groups.

First of them is jurisdictions subject to a FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdiction. Now only Iran is in this group.

Second group includes Angola*, Democratic People's Republic of Korea (DPRK), Ecuador and Ethiopia. These are jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of February 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction. Despite the FATF’s efforts, these jurisdictions have not constructively engaged with the FATF or an FSRB as of February 2010 and have not committed to the international AML/CFT standards.

Pakistan, Turkmenistan and São Tomé and Príncipe are in the third group. The group constist of jurisdictions previously publicly identified by the FATF as having strategic AML/CFT deficiencies, which remain to be addressed as of February 2010.

Ukraine is not present in any of these problematic groups. It is mentioned in the list of countries the FATF and the FSRBs will continue to work with and to report on the progress made by them in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans.

FATF notes that “Ukraine has demonstrated progress in improving its AML/CFT regime; however, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ukraine has made a high-level political commitment to work with the FATF and MONEYVAL to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II), (2) enhancing financial transparency (Recommendation 4); and (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III).”

Couple of notes on Ukrainians’ propensity to borrow

According to reports from local collectors, on average 65% of the total number of debtors, as a rule, are residents of large cities. (Surely, for each bank this figure may vary).

Collectors say that residents of small cities and villages are less likely to study loan contracts thoroughly, therefore the amount of penalties and similar additional payments are often surprise for them.

Also, because the debtors in the cities tend to have higher income levels, their frequency and amount of loan repayments is higher. In rural areas, it is common that loans are taken by the borrower who initially can not afford it, yielding to momentary impulse.

The structure of the debts of the inhabitants of large cities and smaller settlements is similar - the lion's share of them are small retail loans and debts on credit cards.

Ukraine's short-term expenses

Bloomberg provides us with future expenses that Ukraine has to undergo in April:

• pay Russia $700 million next month for its natural gas consumption 
• pay $748 million obligation to cover domestic debt coming due

 These payments should be done under no state budget for 2010 yet approved and no financing from IMF forthcoming. We don't think that there is a risk of non-payment, however, the situation is quite tough for the new governmnet.

Ukraine's foreign and local currency sovereign ratings rise

S&P raised Ukraine’s foreign currency sovereign credit rating by one notch to ‘B-/C’ from ‘CCC+/C’ and the local currency rating to ‘B/B’ from ‘B-/C’, with a positive outlook on the country. The agency said the new governing coalition and cabinet pave the way for a renewal of relations with the IMF and better policy coordination that will allow Ukraine to restore economic and fiscal sustainability. S&P noted the positive outlook on Ukraine indicates “upward pressure on the ratings building this year and next if fiscal and external pressures abate.” Additionally, the agency noted greater investor confidence post-election will favour a higher external debt rollover rate and larger FDI inflows to the country, thus improving Ukraine’s financial account balance in 2010. Ukraine was downgraded to ‘CCC+/C’ in February 2009 on the back of risks to IMF funding to the country.

Yanukovich's stability has come?

It is second day of unprecedented growth of Ukrainian stock market. While European indexes were moving lower, Ukrainian ones were setting new record highs for 2009-10. As experts of Astrum investment management company point out, Ukrainian stock market continued on its winning streak setting fresh records on solid gains in steel, electricity generation and machinery shares.

At the end of the day, the UX index jumped a whopping 3.8% setting a new record at 2,022 points, while the PFTS index also added 3.8% to close at 782 points. Equity volume on the UX totaled strong UAH 70m. Motors Sich (+6.3%) was among the biggest growth catalysts on the news about new future contracts for aircraft and helicopter engines. The biggest outsider was Bank Forum, down 3.2% on the unwinding of speculative long positions.

FX market is quiet under tight control of NBU. The hryvnia continued to stand firm at the UAH/USD 7.98 mark. The NBU made its regular pro-dollar intervention at this rate and market players continued to stick to this reference point.

PS Of course it is necessary to mention CDS that are cheaper now. Is it Yanukovich's arrival or Timoshenko's departure?

Couple of words on Ukrainian mobile operators' future

New political order in Ukraine will influence telecom market. In detail, major operators of cellular networks may face changes. In this post, we will cite some thoughts on this matter from Roman Khimich, one of the leading experts in Ukrainian telecommunications.

First, reorganization of system of state regulation of the market is possible. Russian model may serve as an example, where all the regulatory functions are concentrated in one administration for communications. Now local telecom market is regulated by several government institutions, from which national commission for regulating communications (NCRC) and Antimonopoly committee are the most important ones.

Astelit (Life trademark) operator possibly can gain a lot from recent political changes. However, the experience of previous years show that System Capital Management (SCM), who is a stakeholder of Astelit, hasn’t show propensity to influence systematically the government policy in telecom sector. SCM has enough lobbysts but the level of ideas that they offer, to experts’ opinion, doesn’t correspond the role of the corporation that it plays on Ukrainian telecom arena. At least, at present time.

For Antimonopoly committee, hard times has come. It is easy to take some decision that is not favorable for ruling political group. Therefore, we will repeat it again, NCRC will play the prominent role in sector’s regulation.

Stocks extend gains in line with European markets on strong commodity prices

The Ukrainian stock market on Wednesday traded in line with its European counterparts which extended their gains for the fourth consecutive trading session, says report by Astrum investment management company.

European and American markets were higher on Wednesday due to the better than expected data on retail sales and PMI Services in Germany, as well as ISM Services index in the US. As a result the DAX index rose more that 0.8% to as high as 5,830 points and the oil price advanced to above USD 80 per barrel once again.

The UX index added 1.1% to close at 1833 points, with the gains pretty much across the board. The PFTS index gained 0.7% to 718 points. Trading activity was well above average, equity volume on the UX totaled UAH 47m. Bank Forum was the leading and most actively traded issue, shooting up 7% on UAH 6m trading volume.

The stock was up on the rumours of the sale of the minority interest by Leonid Yurushev to Commerzbank which should open the way for the Bank's recapitalization.

Consensus forecast for Ukraine in 2010: moderate growth is coming.

Members of the regular public consensus forecast improved forecast of economic growth in Ukraine in 2010 from 3,5% to 4%. However, the average expected fiscal deficit worsened immediately by 30 billion hryvnia - up to 85 billion hryvnia (7.4% of GDP). According to the median forecast of participants, in 2010 nominal GDP will exceed a trillion hryvnia.

The consensus forecast of economic growth was improved due to accelerating consumption (+0.4 percentage points compared with the forecast of December 2009) and investment (+0,6 percentage points). Among the sectors, the best expected dynamics is for the the industry (6.8%) and transport (6%). The most dynamic industries in 2010 promise to be mechanical engineering (11.3%) and steel (+10%).

The participants of the forecast improved their outlook for employment. Expected unemployment rate fell by 0.5 percentage points to 8,5% among people 15-70 years old (the methodology of the ILO). At the same time, the expected growth of real incomes of the population remains at that level of 2% (while some have predicted the fall of this index).

Analysts and research institutions, banks and other financial institutions have kept the average forecast exchange rate at 8.20 UAH / USD. (range of forecasts narrowed to 7,80-8,80).

Forecasts of inflation are sharply volatile. Average growth of CPI (December to December) was 13,3%, despite the fact that the maximum projection of one of the participants reached 20%. Prices of industrial producers will grow faster than the consumer, that is clearly associated with an acceleration in the industry.

Forecasting budgetary performance remains a matter of great difficulty for the participants because of lack of information about the actual state of the treasury. The outlook on the state of public finances has provided only half of participants.
In 2010, the deficit of public finances ranges from 4,4% to 9,8% of GDP. The main source of deficit is external borrowing. Participants of the consensus forecast also believe that the capitalization of banks may require from 10 to 25 billion hryvnia public funds this year.

The data for the current wave of the consensus forecast was provided by Astrum Investment Management, Concorde Capital, Dragon Capital, Erste Bank, FOREX Club, Gainsfort Research, OTP Bank, BTA Bank, Institute for Economic Research and Policy Consulting, International Bleyzer Fund, Ukrainian business magazine "Expert", investment group "Socrat", International Center for Policy Studies.

The results of the consensus forecast (average, minimum and maximum difference between the minimum and maximum values, the number of forecasts for each parameter), as well as assumptions that guided the participants in forecasting, attached to this release. Information about prognosis in the context of each participant is closed, since 6 out of 13 participants were asked not to disclose details of their forecasts.

Consensus forecast project is conducted by Expert business magazine.

If you want some additional info regarding macroeconomic or sectoral forecasts for Ukraine in 2010 please contact Igor Lutsenko (ilutsenko at gmail.com).