Tuesday, 8 February 2022.
Economics
Ukraine’s GDP growth accelerated considerably to 5.9% YoY in 4Q21, which implies full 2021 GDP growth rate of 3.3% according to our estimates.
The GDP growth came in above our projection of 5.0% for 4Q21 and 2.9% for full 2021. Detailed breakdown of GDP components will be available at the end of March.
ICU view: Even though economic growth turned out stronger than expected, we still believe it was unimpressive given that GDP contracted 3.8% in 2020 and the comparison base was extremely favorable.
According to our estimates, agriculture alone contributed above 1.5pp to 3.3% GDP growth last year via direct and indirect effects thanks to a bumper harvest. Real GDP growth above 3.0% implies Ukraine will make a VRI payment in 2Q23.
Our tentative estimates imply that 0.1% of GDP growth above 3.0% (but below 4.0%) means a VRI pay-out in the range of $27-29m in 2023 depending on the final number for the 2021 GDP deflator and the exchange rate before the payment.
This implies a yield just above 2.5% based on nominal value of the portion of the Eurobonds that were converted into VRIs. Looking forward, we expect economic growth will remain muted in 2022 given a number of headwinds, including high energy prices, slowing domestic demand, and slowing growth of Ukraine’s key trading partners.
Ongoing tensions with Russia are yet another risk factor that heavily undermines business and investor confidence and may delay large investment projects. We expect GDP will grow 3.2% in 2022.
Bonds: Eurobond market gradually calming
Last week, the decline in Ukrainian Eurobond yields continued as investors’ fears of a Russian invasion of Ukraine is gradually lessening.
The Eurobond market is slowly calming, as more favorable information is received about diplomatic steps to decrease risks of Russian aggression. However, in general, the number of Russian troops gathered near the border is still quite large.
Last week, the Prime Minister of the UK and the President of Turkey visited Ukraine, and statements were made on the preparation of a tripartite alliance between Ukraine, Poland, and the United Kingdom. Also, the start of the Olympic Games and the visit of the President of Russia to Beijing significantly reduced the level of news regarding attacks on Ukraine.
Overall, the reduction in fears of active hostilities contributed to the yield on Eurobonds falling to 9.5-13.3% from 10.4-26.6% two weeks ago.
ICU view: This week, the world may be more focused on the Olympic Games than on Ukraine, and the level of negative news about Ukraine should decline. Although investors may still gradually reduce sales, it is possible that more of them will take the opportunity to buy Ukrainian Eurobonds with a very attractive yield. And as a result, YTMs may still decline.
FX: The hryvnia is on the way to appreciation
After reaching a seven-year low at the end of January, the hryvnia ended last week with the exchange rate at UAH28.12/US$. The situation in the FX market will continue to strengthen the hryvnia exchange rate.
The general decline in the severity of allegations of possible Russian aggression and the intensification of hard currency sellers allowed the hryvnia to appreciate by 2% over the past week. However, since the beginning of the year, the hryvnia weakened against the US dollar by a moderate 3.1%.
The balance of the FX market has improved as supply has increased, while the total amount of daily trading has decreased. This was especially noticeable on Monday, when the NBU bought US$178m in reserves from the market. In just one week, almost US$334m of hard currency was bought into reserves.
ICU view: An increase in supply with a general decline in daily trading indicates a decrease in fears of further escalation of Russia’s aggression and lower expectations of further weakening of the hryvnia. Therefore, exporters have increased their presence in the FX market, while the demand from market players who aggressively purchased hard currency in January has already been met. Foreigners still exit from local-currency debt at the same pace, so their demand for hard currency did not increase either. Therefore, under current conditions, we expect that the hryvnia will continue to gradually move towards strengthening this week.
Economics: Ukraine’s C/A turns negative at 1.0% of GDP in 2021
Ukraine’s current account (C/A) balance recorded a deficit of 1.0% of GDP ($2.1bn) in 2021, which is a deterioration from a 3.4% of GDP surplus in 2020.
The deterioration was primarily driven by a rapidly growing income that non-residents earned on their foreign direct investments into Ukraine (a part of primary income of C/A). Total earnings surged to $15.2bn in 2021, from $3.9bn in 2020. This growth in investment income came on the back of surging commodity prices and a related improvement of companies’ financials. Meanwhile, the deterioration in FDI income balance was partly offset with a robust 28% YoY increase in migrant remittances to $15.0bn (7.5% of 2021F GDP). The trade balance deficit remained largely unchanged at 1.5% of GDP as rapid growth in export revenues was offset with a surging imports of consumer and investment goods.
The financial account balance came in positive at $2.6bn largely thanks to net FDI inflows ($6.0bn, 3.0% of GDP). More than 80% of such inflows were nothing but reinvestment of the FDI income by non-residents. While the financial account inflows fully compensated for the C/A gap, Ukraine’s external accounts were additionally supported by the IMF money ($2.7bn in SDR allocation minus $0.7bn net outflow of the IMF loans).
ICU view: We expect the C/A will deteriorate in 2022 due to persistently high energy prices and weaker YoY prices for Ukraine’s key export commodities. We currently project a 2022 C/A gap of 2.3% of GDP with downside risks to this projection. The financial account is also at significant risk as risk premia for Ukraine-related assets grew significantly in recent months due to Russia’s threat of military invasion. We, nevertheless, believe that any lack of funding from private capital markets will be fully offset with concessional funding from IFIs and Western governments, which indicated they are prepared to provide a substantial package of financial support to Ukraine. The chances are still high that this way Ukraine will be able to cover the larger C/A gap and Sources: National Bank of Ukraine, Bloomberg, ICU.
RESEARCH TEAM
Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
Complete Report (7 pages)
