Ukraine’s Value Valley Validations
Ukrainian stocks and bonds were abandoned by the hardiest investors as the industrial East contributing half of output continued to verge on civil war after Crimea’s Moscow defection, despite transfer of an initial $3 billion for budget coverage under the IMF’s $17 billion program. Templeton Funds in particular came under fire as its global bond portfolio with large positions took redemptions as equity head Mobius admitted holdings were “trapped” without buyers. The $15 billion exchange was still up 4 percent through April as EPFR reported $20 million in foreign outflows. After end-May presidential elections, where a well-known oligarch is favored, the June coupon for last December’s $3 billion Treasury infusion under the Yanukovych-Putin agreement is due, with Kiev likely to refuse under the “odious debt” doctrine which last applied in post-Saddam Iraq. The sovereign rating is already at CCC near-default as S&P confirmed that further territory loss would probably spark that outcome, and the IMF speculated that such a scenario would reorient the entire envelope of international community support. This year the same $3 billion is owed the Fund from the prior lapsed arrangement as Q1 reserves were down to $15 billion or two months’ imports. The economy is predicted to shrink at least 5 percent on 15 percent inflation as the fiscal deficit doubles to 12 percent of GDP, one-third from gas shipment costs. The current account gap will be of similar magnitude with the hyrvnia off 30 percent so far against the euro as free-market theorists revive post-communist calls for a strict currency board. Banks are under a trading ban with exchange controls imposed under the previous government still in place. The US $1 billion Eurobond guarantee which passed Congress after it was detached from a 4-year old IMF appropriations request is unlikely to instill confidence in tackling the debt morass as members urge tougher Russian banking and energy sanctions to aggravate the confrontation. Company and individual targets have yet to reach core names on the benchmark CEMBI, although the Treasury Department has warned fund managers of the prospect as senior Obama Administration officials dissuade top business executives from attending the annual St. Petersburg investment forum.
Corporate bond sales into April were less than $5 billion, an estimated half the monthly rollover requirement and only one-fifth of issuance during the same 2013 period, although ratings agencies believe many firms can draw on cash or tap refinancing alternatives though year-end. Fund exit is over $500 million according to EPFR as heavily foreign-controlled equities are also off 20 percent at the bottom of the main MSCI universe. Stagflation was evident before the Ukraine standoff, as budget and current account deficits could soon loom. Capital outflows in the first quarter may have exceeded 2013’s $65 billion total, and domestic bond auctions fail regularly on high yield demands as retail depositors shift out of rubles on post-Soviet era panic parallels.
