Ukraine’s Borderline Bank Rescue Recoil
Ukraine bonds solidified EMBI index double-digit gains after the central bank, following months of hesitation in directly confronting industry leader Privatbank’s $5.5 billion capital shortfall, seized it in a move that will swell the budget deficit that must stay within 3 percent of GDP under the IMF program, and exact bank bondholder pain under bail-in provisions. President Poroshenko appealed for calm and submitted legislation to further protect its 20 million depositors, as the political opposition lambasted the bailout as a “great robbery” and called for fresh snap elections. Shareholders headed by well-known oligarch Kolomolsky, who underwrote military operations to eject Russia-backed rebels from the East, had put in millions of dollars in a last-ditch bid to shore up the institution with a 40 percent bad loan portfolio and near-default credit rating, after rival Delta Bank was closed last year for prudential violations. The magnate had fallen out of favor as the border conflict drew to a standstill and suffered losses on other business holdings on meager 1.5 percent GDP growth this year. Ukraine may soon be left to face the incursion on its own as incoming US President Trump has placed warmer relations with Russia seemingly higher on the agenda to include possible sanctions removal. Banking and geopolitical woes have overshadowed energy reform as Naftogaz tariffs went to full cost recovery, and anti-corruption agency and electronic tax filing launch which met Fund disbursement criteria. Releases continue to be delayed but front-loading and replenished reserves have reduced urgency, and the government pledges to tackle outstanding pension and privatization issues in the coming months assuming survival of no-confidence votes. Inflation is to fall to single digits in 2017 within a target band, but the currency could again falter toward 30/dollar to undermine control. So long as Russian commercial restrictions remain in place and the Dutch and other reject EU bilateral free trade, depreciation will offer only a limited export boost and the current account gap will be frozen around 4 percent of GDP and depend on future official financing to bridge it. In FDI agriculture has been a bright spot as the country may soon ranking third globally in food output after the US and Brazil. Giants like Archer-Daniels, Cargill and Bunge have leased vast local tracts, with outright ownership still prohibited and sales subject to a moratorium through 2018. The richest lands are located in the war zone around Donbas, and operations there have been erratic with fighting eruption despite a nominal ceasefire.
Russian stocks continued to rally as Emerging Europe champions notwithstanding the prospect of new US congressional penalties for cyber-attacks to affect the presidential contest. Oil price rebound to over $40/barrel has been the overriding positive economic story against the backdrop of persistent recession and 5 percent-plus inflation. Although mortgage rates have reverted to pre-crisis levels, consumer borrowing and sentiment is lackluster, with retail sales off 5 percent in October. President Putin, who will decide on another run for 2018, has charged the Finance Minister with drafting an ambitious structural reform agenda, but previous blueprints were routinely ignored. The central bank stayed on hold and reiterated the importance of ruble free-float as an eventual competitive safety valve, but many foreign investors preferred to focus on the Trump Administration’s tapping of former Exxon chief executive and Putin ally Tillerson as Secretary of State for a tactical buy.
