Экономика и политика

The Ukrainian Parliament has passed the 2009 budget on Friday, December 26, 2008. The bill was supported by 226 MPs, exactly the number needed to pass the budget.

While the exact text of the document is still pending, Parliament Speaker Volodymyr Lytvyn has reported that budget revenues have been increased by UAH 2 bln (USD 257 mln), compared to the earlier version of the budget, which failed to pass in Parliament on Thursday. The previous draft assumed UAH 237.6 bln (USD 30.5 bln) budget in revenues, which is 2.4% higher than budget revenues in 2008. Budget expenses were proposed to increase 4.9%, compared to this year’s budget, to UAH 265.6 bln (USD 34.1 bln). The previous version of the budget bill suggested a UAH 28 bln (USD 3.6 bln) budget deficit with a maximum permissible budget deficit of UAH 31 bln (USD 4.0 bln).

The proposed budget assumed GDP growth at 0.4% in 2009 and consumer inflation at 9.5%.

Our view: Sokrat was correct in its previous daily when predicting that the previous failure of the budget draft was a political decision and the budget will be passed through the Parliament soon.

As we view the government’s macroeconomic forecast as overly optimistic, we believe the accepted budget draft is hardly accomplishable, especially with respect to the part on revenues.

Sokrat anticipates a GDP decline of 6.5% in 2009 and inflation at 16.5%.

Late Christmas day State Statistics Committee of Ukraine announced that the average salary in Ukraine fell 4.9% MoM and the volume of delayed wages grew by 66.4%.

The average salary in Ukraine dropped to UAH 1,823 (USD 234). The highest average salary of UAH 3,140 (USD 403) was witnessed in the city of Kyiv, representing a 2.2% MoM decline, while the lowest average salary of UAH 1,410 (USD 181) was registered in Ternopil region , which represents a 0.7% MoM decline. Still, the average salary in Ukraine has grown 22.7% YoY.

Sector-wise, the highest average salary of UAH 4,471 (USD 574) was in aviation, representing a growth of 0.1%. The lowest average salary of UAH 1,036 (USD 133) was in the textile industry, representing a 5.2% decline. The greatest MoM decline of 18.7% occurred in the transport machinery sector, where the average salary dropped UAH 1,656 (USD 213). The biggest MoM growth of 13.3% was observed in fisheries, where the average salary grew to UAH 1,103 (USD 142).

At the same time, the volume of delayed salaries grew 66.4% MoM, thus reaching UAH 1,737 mln (USD 223 mln). The biggest deficit was registered in Donetsk region (UAH 499 mln or USD 64 mln), Luhansk region (UAH 224 mln or USD 29 mln), and Kharkiv region (UAH 124 mln or USD 16 mln).

Sector-wise, the biggest MoM growth in the wage deficit was observed in forestry (326.2%), transportation and communications (204.9%), and education (137%).

Our view: We see a drop in average wages and an increase in the volume of delayed wages as a consequence of the unwinding economic downturn in the country, as industrial output and GDP continues to demonstrate negative dynamics in the past few months. Industrial output fell 15.2% MoM and 28.6% YoY in November, as GDP declined by 14.4% YoY, with the pessimistic trend expected to continue until at least 2Q09. As the current and anticipated revenues of Ukrainian companies decline, employers have decided to cut existing salaries and delay wage payments.

We also believe that part of these negative wage statistics is a result of employers deciding to pay wages unofficially, thus saving on tax payments.

The recently-announced increase in official unemployment figures is an additional factor of the real sector’s influence on the labor market.

Notably, the strategically important metallurgical sector demonstrated a higher than average salary decline at 12.8%, on average, as some of metallurgical companies announced they would scale down operations to a 24-hour working week.

Overall, we anticipate an increase in unemployment in 1Q09, the further decline of official salaries, and an increase of debt. We anticipate that the Ukrainian economy will soon enter a recession, which will continue until 3Q09, and that the economic situation will be highly vulnerable with respect to the global steel market and negotiations about the price for imported natural gas.

Ukraine’s Parliament has failed to pass the 2009 draft budget proposed by the government. The draft budget proposed expenses of UAH 265.6 bln (USD 34.1 bln) and profits of UAH 237.5 bln (USD 30.5 bln). The project was supported by 223 MPs while 226 votes were needed for this bill to pass.

Previously, in September 2008, the government had proposed a budget with UAH 302.2 bln in expenses and UAH 288.1 bln in profits. In November 2008, however, the government retracted that draft budget in order to revise it, taking the global financial crisis into consideration.

Our view: We view the current draft budget’s failure as an outcome of politically-driven voting. At the moment, tensions in Parliament are high enough to potentially lead to the dismissal of current Prime Minister Yulia Tymoshenko.

While we believe that the budget that will eventually be accepted will not differ much from the one that failed yesterday and that Yulia Tymoshenko will stay in power until at least spring, we anticipate that extensive negotiations with opposition forces will be required before the budget is finally accepted. Overall, we believe that the government will make every possible effort not to leave power amidst this economic downturn, especially given the potentially negative influence of such a movement on Tymoshenko’s rating just a year before the Presidential elections.

We also allow for the possibility that current Minister of Finance Viktor Pynzenyk will resign, as he made statements on a number of occasions that he disagrees with the current policy of the government and since the failure of the state budget may be the last step towards his resignation. While we do not exclude such a possibility, we do not view the odds of this happening to be significantly high.

The Ukrainian Parliament has passed a bill that temporarily imposes an additional 13% tariff on all imports except critical imports (to be defined by the government). The bill was supported by 269 MPs from the governing coalition and Communist Party. The bill is to stay in force for six months with a possible six-month extension. While the exact list of critical imports is pending, MPs have banned frozen beef, all types of pork, meat products, canned seafood and liquors from the critical imports listing. The critical imports will also not include coal, some categories of textiles, nor machinery products, including cars and trucks.

Officials have confirmed that the measures were coordinated with the IMF and WTO and are aimed at straightening out Ukraine’s trade balance and increasing budget profits as Ukraine anticipates entering a recession in 2009.

An earlier reported figure for the trade balance in January-October 2008 is negative USD 14 bln, constituting a 19.6% YoY increase. It was also announced that, due to the global financial crisis, the financial account balance was negative in January-October, causing a double deficit.

Our view: We believe that the bill will somewhat suppress imports and, thus, stimulate domestic production and will, overall, be beneficial for the Ukrainian balance of payments. We also anticipate that the devaluation of the UAH in late 2008 – early 2009 will be also support straightening out Ukraine’s trade balance.

Nevertheless, we recognize that the main determinant of the trade balance deficit – imported oil and natural gas – will be most likely be included in the list of critical imports and will not be a subject of tariff increase. However, we expect that the bill may somewhat improve the trade balance in other sectors of the economy, including food production, machinery and the textile industry. In addition to improving the balance of payments, the bill will also spur demand for domestically-produced goods, thus supporting domestic producers, which may be the right step to make on the part of the government as we anticipate an overall curb of Ukrainians’ purchasing power that will trigger a downturn in consumer demand. The bill, therefore, will counteract the negative impact of a purchasing power drop and will support Ukrainian producers.

In our view, such agricultural companies as sugar producers (e.g. Astarta, Ukrros) and companies involved in cattle, pig-breeding and poultry (e.g. MHP) will benefit the most from the bill. Besides, according to our estimates, Ukrainian poultry producers will be able to fully cover the domestic demand for poultry in 2009. We also hold a positive view with respect to local motor vehicle producers (e.g. LUAZ and UkrAvto). An increase in import duties on foreign cars, together with the virtual end of retail loans programs focusing on the car segment, will be a supporting factor for local vehicle manufacturers. Besides sectors above we think that local household appliance (NORD) will receive benefits.

Overall, we view the bill as a timely and appropriate step, leading to a triple dividend of improving the balance of payments, supporting domestic producers, and increasing budget profits in 2009.

The gross external debt grew 42.0% or USD 31.2 bln between October 2007 and October 2009 and reached USD 105.4 bln.

The sovereign debt grew 6.8% and reached USD 14.2 bln. The external debt of the banking sector grew 63.2% and reached USD 42.1 bln. The external debt of other sectors grew 40.2%, reaching USD 44.3 bln.

Our view: We view the modest dynamics of the sovereign debt as somewhat comforting in light of the anticipated drop of Ukraine’s foreign reserves in 2009 that were spent on supporting the UAH and the Ukrainian banking system. The foreign reserves of Ukraine remain above USD 30 bln, which, coupled with the outstanding balance of 11.9 bln of the IMF standby loan, will suffice to allow for coverage of the sovereign debt.

We further view the currency reserves of the banking system as fully sufficient to cover the banking system’s foreign debts. Additionally, we see most of the foreign debt accumulated in the banking system falling on those banks that are affiliates of foreign banks, which can provide support for their daughter banks denominated in foreign currency, decreasing their sensitivity to the UAH’s devaluation.

We find companies in the real sector of the Ukrainian economy as the potential victims of the increased foreign debt. We further view those companies oriented towards the domestic market as the most vulnerable to their foreign debt increase given the unprecedented UAH devaluation. Nevertheless, we still view the Ukrainian real sector’s Eurobonds issuers, such as Interpipe (INPIP), Azovstal (AZOVTL) and Mironivskiy hliboprodukt (MHPSA) as fully capable of servicing their foreign debt, as these companies export much of their output. At this point, we would like to recommend treating another real sector Eurobond issuer – Naftogaz Ukrayiny (NAFTA) – with caution as we believe that its default risks and vulnerability to the currency risks are higher than those for other Ukrainian Eurobonds with a similar yield.

The CA deficit in Ukraine shrunk in 3Q08 to USD 1.6 bln; a 47.5% decrease compared to the CA deficit in 2Q08 of USD 3.0 bln. The trade balance deficit has contracted to USD 2.1 bln, compared to USD 3.6 bln in 2Q08. The financial account surplus was not altered substantially, staying around USD 2.3 bln. Foreign direct investment fell to USD 3.4 bln, compared to USD 3.8 bln last quarter.

Therefore, the CA deficit in January-September 2008 reached negative 5.8% of GDP or USD 8.4 bln. However, a high financial account surplus resulted in a positive balance of payments at the USD 6.3 bln level.

Our view: The CA deficit’s contraction in 3Q08 is mainly caused by a decline in the trade balance deficit. Such a dynamic is traditional for Ukraine at harvest time as agricultural exports increase. We forecast that the devaluation of the UAH in 4Q08 will have a supporting effect on the CA until the end of 2008 and beyond. We anticipate that the CA deficit in 2008 will not exceed USD 14.5 bln. Natural gas imports and a decline in steel exports will be the main driving forces behind the CA deficit’s acceleration in 4Q08.

We believe that the continuing depreciation of the hryvnia will support domestic production while suppressing imports in 2009, leading to a trade balance deficit shrinkage in 2009 compared to this year. The anticipated increase in imported gas prices, coupled with the continuously low prices for steel, the main Ukrainian export article, will counteract the effect of the UAH’s devaluation in terms of the trade balance deficit shrinkage.

Based on the historical record, we anticipate that the services balance will continue to stay positive and will somewhat compensate for the merchandise deficit.

Sokrat anticipates that the trade balance deficit will amount to USD 15.5 bln in 2009. We further anticipate a 23.0 bln CA deficit in 2009.

Ukraine’s real GDP fell 14.4% YoY in November after a 2.1% contraction in October. Therefore, the GDP YoY growth in January-November 2008 reached 3.6%, compared to the 5.8% growth seen in January-October 2008.

The biggest growth in January-November occurred in agriculture (18%), transportation (9.3%) and trade (2.3%).

Real GDP growth reached 7.6% in 2007.

Earlier, it was reported that the industrial output fell 28.6% YOY in November 2008 and contracted 0.7% YoY in January-November 2008.

Our view: We view the substantial drop in industrial output as a main driving force of Ukrainian GDP dynamics. Industrial output accounts for nearly 50% of Ukrainian GDP and its dynamic is the most influential factor behind GDP growth.

We view the substantial drop in steel prices, the main Ukrainian industrial output, as the main reason for the industrial output and GDP contraction. We anticipate that Ukrainian GDP will continue falling in yearly terms until at least 2Q09 and will not continue to grow until new steel contracts are negotiated in mid-spring and metallurgical plants start running. As of today, some of the big metallurgical factories remain idle.

Sokrat lowers its previous GDP growth forecast for 2008 to 1.8% and is still keeping its forecast for 2009 under review.

Passenger transportation volumes in Ukraine grew 2.4% YoY in January – November 2008, reaching 7.65 bln passengers, as stated in the recent National Committee of Statistics memo. The turnover of passengers reached 136.4 bln passenger-km, growing 5.1% YoY. The growth figures are slightly lower than the January-October figures of 3.1% and 5.8% growth, respectively.

Railways transported 411.7 mln passengers, growing 0.1% YoY (0.1% YoY growth in October); the turnover reached 49.6 bln passenger-km, representing a 0.8% YoY growth (1.0% growth in October).

Automobile transport transported 4.0 bln passengers, growing 5.4% YoY (5.8% YoY growth in October); the turnover reached 56.4 bln passenger-km, representing a 10.4% YoY growth (11.0% growth in October).

Air transport saw the transportation of 5.8 mln passengers, growing 28.2% YoY (29.4% YoY growth in October); the turnover reached 10.2 bln passenger-km, representing a 15.1% YoY growth (16.7% growth in October).

Transport and communications accounted for 8.2% of Ukrainian GDP in 2008.

Our view: We view the declining growth rates for passenger transportation in November as an indicator of the more conservative consumer behaviour of Ukrainians, triggered by pessimistic expectations about the overall prospects of the Ukrainian economy and, in part, about the wellbeing of Ukrainians. Another driving force of the decline in the growth rate is the downturn in business activities, forcing businesses to cut their travel expenses.

As we anticipate a continuing economic decline in Ukraine until at least 2Q09, we expect that transportation growth rates will stay moderate.

The largest Ukrainian pipe producing group, Interpipe, has announced that it offers to repurchase USD 200 mln in Eurobonds with an indicative repurchase price of USD 47-55 corresponding to the 67-53% YTM level. The final repurchase price is to be confirmed on December 15, with applications being accepted until December 18, 2008.

The only existing Interpipe Eurobond issue (INPIP-10, ISIN ID: XS0310283709) matures on August 2, 2010, with a bullet-type maturity and an 8.75% coupon that is paid semi-annually. Prior to the announcement that Eurobonds were traded at the USD 40 level, USD 3 up from the price on Monday, December 8, 2008, when the bonds were traded at the USD 37 (93% YTM) level. After the announcement, the bonds’ price rallied to USD 44.

Interpipe has suggested Eurobond holders increase the permissible debt to EBITDA level from 3.5 to 4.5. Interpipe has also proposed to exclude the recent USD 335 mln loan from the total volume of debts. The loan was received in August 2008 on a security of the Italian SAGE export agency to construct a new electric arc furnace. In exchange, Interpipe is ready to increase the coupon 1.5 p.p. to 10.25%.

The Interpipe Group specializes in the production of OCTG, general pipes and railway wheels. The Group controls two traded companies – the Interpipe Niznedneprovsky Tube Rolling Plant (NTRP) [NITR UZ, U/R] and the Interpipe Novomoskovsk Pipe-Production Plant (NMPP) [NVTR UZ, U/R], as well as the non-traded CJSCs Interpipe Niko-Tube and the Interpipe Pipe Company.

Interpipe’s output accounts for 4.3% of global seamless drawn pipes. The company’s annual sales in 2007 reached USD 1.8 bln, corresponding to 1.472 mln metric tons of pipes and wheels.

Our view: We view Interpipe’s offer as a justified step given the clear undervaluation of Ukrainian Eurobonds (see Sokrat’s recent Eurobonds report dated November 28, 2008). The offer also demonstrates that, despite the economic downturn in Ukraine in general and the metallurgical sector in particular, the group has sound liquidity compared to its competitors.

We anticipate that, given the attractiveness of Ukrainian Eurobonds, some of the issuers may follow the same strategy in the near future and offer their Eurobonds for repurchase. We suggest that potential short-term investors should pay special attention to Eurobonds issued by companies that perform well, as compared to their competitors. Ukreximbank’s Eurobonds (EXIMUK-11, EXIMUK-12 and EXIMUK-16), Myronivskyi Hliboprodukt’s Eurobonds (MHPSA-11), and Ukrsotsbank’s Eurobonds (USCBUZ-10) may be among the Eurobonds to be offered for repurchase in the near future.

Ukraine’s industrial output fell 15.2% MoM and 28.6% YoY in November 2008, as stated in the State Statistics Committee memo released this morning. This picture continues a negative tendency started in August 2008, when industrial output fell in both MoM and YoY terms (-5.3% and -0.5% respectively). Industrial output continued falling in September (-4.1% and -4.5% respectively) and October (-7.6% and -19.8%). Industrial output for January-November 2008 fell 0.7% YoY, compared to the 2.2% growth witnessed in January-October 2008.

The biggest loser in terms of output was the machine-building sector (falling 32.5% MoM and 38.8% YoY) and, especially, its transport machinery-building component (-46.0% and -51.6% respectively). The extracting industries, taken as a whole, was another leader in terms of shrinkage (-25.9% and -32.1% respectively), and especially its non-fuel component (-52.4% and -40.2% respectively). Metallurgy and metal processing fell 23.5% MoM and 48.8% YoY. The chemical and petrochemical industries fell 20.6% MoM and 35.2% YoY.

The only two sectors demonstrating growth were the coke and oil processing sector (33.9% MoM growth and 11.6% YoY decline) and utilities production (5.3% MoM growth and 19.4% YoY decline). All sectors of the economy demonstrated a YoY drop in November.

Our view: As we forecasted last month, industrial output has continued to fall in November. The rate of decline continued to accelerate and we anticipate that the MoM decline will continue until the end of 1Q09.

We observe a shrinkage in the machine-building sector as largely caused by the global economic downturn and the related shrinkage in foreign demand for Ukrainian machinery, as a substantial part of machinery output is exported. Another reason is the anticipation of Ukrainian car producers of the suppressed demand for cars on the part of domestic consumers, caused by the pessimistic expectations of the state of the economy and the lowering of Ukrainians’ purchasing power.

Declining prices for commodities worldwide was the main reason for the shrinkage in the extracting industries, chemical sector and metallurgy.

The coke and oil processing sector demonstrated growth mostly due to the fact that many oil processing plants remained idle in 2Q08-3Q08 due to high oil prices. These plants are now enjoying falling oil prices and consequently, an increase in their output, while still demonstrating a YoY decline. This clearly witnesses that continuing low oil prices will support MoM growth in this sector in the near future.

Despite the decline of industrial consumption, the beginning of the heating season resulted in a MoM growth in the utilities production sector; however, this was not enough to provide YoY positive dynamics.

Sokrat anticipates that industrial output will not demonstrate persistent YoY growth until mid-2009, as Ukraine is entering the recession stage. We revise our industrial output forecast for 2008 down to negative 2.0% and currently keep our 2009 forecast on hold.