Norvik Research 23.08.2016

23/08/2016 16:36

Global developments

The dollar’s recovery came to a halt as outlook for Fed actions this year remains uncertain. The dollar index is down 0.2% today. 10-year US Treasury yields are up marginally at 1.546% after tightening 3 bps yesterday. S&P futures are up 0.1% today; the Euro Stoxx 600 is up 0.9%. Nikkei 225 is down 0.6% as the yen appreciated 0.2% to 100.1 against the dollar. Chinese CSI 300 is up 0.2%. Bloomberg commodity index is up 0.2%.

Oil prices are declining amid additional supply concerns. Nigeria’s oil output is set to rise as militants are now expected to end hostilities soon. Brent prices fell 3.4% yesterday and are down 0.7% today to $48.7/bbl.

Russia and CIS area developments and market colour

The Russian government has decided to replace indexation of pensions this autumn with a large one-off payment in January 2017, to be followed by an even bigger outlay in February. At today’s meeting, Prime Minister Medvedev’s cabinet agreed to substitute the second indexation of pensions this autumn with a payment of RUB 5,000 to each pensioner in January 2017, with an overall cost to the budget of over RUB 200bn. This large payment will be followed by an even bigger one in February 2017 when “regular” indexation of pensions on the full-year 2016 inflation will take place, estimated at RUB 270bn in total. These large-scale social payments will complicate the central bank’s task of managing rouble liquidity in early 2017.

Ukraine’s industrial output recovered in July, after June’s very weak results. IP declined 0.2% YoY in July, after a 3.4% YoY drop in the previous month (caused in part by rail cargo disruptions between Eastern regions and the rest of the country). Adjusted for working day difference, IP rose 0.9% YoY and was up 4.0% MoM in seasonally-adjusted terms (on official estimates). In January-July output was 1.7% higher YoY, compared to 2.0% YoY in H1 2016. Main improvement in July was in the mining and quarrying sector (10.5% MoM NSA, -0.4% YoY), while manufacturing lagged (5.0% MoM, -1.5% YoY). Importantly, metallurgy (a key sector) expanded 4.3% YoY in July, having stagnated (0.4% YoY) in the previous month.

The rouble is 0.4% stronger today against the dollar after falling 1.4% yesterday. OFZ yields widened 1-4 bps yesterday and are flat today. Yields on Russia’s longer-term Eurobonds are unchanged after widening 1-2 bps yesterday. Ukraine’s longer-term sovereign bond yields are 0-2 bps tighter. Azerbaijan 24 and Armenia 25 are 2 bps wider, Belarus 18 are 9 bps wider.

Ukraine has been unable to secure approval of the next IMF tranche this month. The released schedule of IMF Board meetings for the remainder of August does not include a discussion on Ukraine. Ukrainian authorities had been counting on receiving up to $4 bn from IMF by the end of the year, however this objective now appears highly unlikely to be met given the lack of progress earlier in the year. We note that the provision of additional EUR 1.2 bn from the EU and $1 bn in Eurobond guarantees from the US are linked to resumption of IMF financing. Among the key outstanding issues are the delay in launching a system of online declaration of incomes and assets for public sector employees, the failed attempt to privatize the Odesa Portside Plant and persistently high deficit of the State Pension Fund. The favourable external environment has allowed the central bank to maintain exchange rate stability in recent months while accumulating FX reserves even in absence of external financing. However, the significance of IFI financing is set to increase in the autumn, in view of seasonal BoP pressures associated with higher demand for FX from the public and Naftogaz (for gas purchases into reserves).

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