Ukraine’s Chafed Chocolate Taste Buds
Ukrainian stocks led the MSCI frontier charge with a near 20 percent gain through end-May as local bond yields reverted to their pre-crisis levels, as chocolate tycoon Poroshenko, a former foreign and trade minister with solid Russian business and political connections, romped to an overwhelming first-round presidential election win. He intends to keep Prime Minister Yatsenuk, a close ally of distant runner-up Tymoshenko, and other economic technocrats in their posts as negotiators narrowed differences with Moscow on overdue gas payments and Presidents Putin and Obama and European heads of state met with him at the World War II Normandy landing anniversary commemoration. The government honored a $1 billion sovereign bond obligation as IMF program money goes basically for debt service at the outset. External corporate issues also were widely lifted to market-weight by sell-side houses on expected default aversion and investment climate improvement and cross-border diversification beyond Russia. Equities there recouped post-Crimea annexation losses but the MSCI Index remained off 10 percent with the ruble down half that amount against the dollar. GDP growth was under 1 percent on an annual basis in Q1 with fixed capital formation slumping 4 percent. April inflation was 7.5 percent and could stay elevated with currency depreciation, although deposit conversion and fund flight have abated in recent weeks with pauses in military and diplomatic confrontation. The army pulled back from maneuvers on the Eastern Ukraine border as President Poroshenko offered rebels amnesty but vowed to maintain counterattacks to reclaim territory. Russian officials again delayed the privatization timetable for minority stakes in name enterprises as foreign buyers keep away with the threat of tighter sanctions and further profit falls as with Sberbank’s doubling of bad loan provisions. Polish shares were up slightly as new export orders dented by the Russia-Ukraine standoff capped the PMI measure at just above 50. The central bank predicts 3.5 percent growth and consumer confidence has rebounded with the zloty following the ECB’s round of quasi quantitative easing. The 25th anniversary of post-communist independence was marked as the last military dictator who ceded power to the Solidarity labor union was honored at a state funeral attended by subsequent prime ministers. The authors of the transition economic shock plan were also prominent in the retrospectives and urged such leaps for Ukraine’s incoming team.
Europe’s political and geopolitical angst turned to Greece and Turkey as they begin to haggle over Cyprus’ fate following large gas finds and tackle their own internal governance challenges. Turkish stocks rose 20 percent through May and the lira was stable despite protests a year after the Gezi park outbreak and a 50 basis point rate cut at Prime Minister Erdogan’s instigation amid nominal central bank independence. Greece’s opposition Syriza party trounced traditional blocs in European Parliament polls as the ruling coalition retains just a two seat majority. The troika released a penultimate disbursement on lingering recession and emigration from the rescue’s bitter aftertaste.
