Ukraine’s Bashed Union Label
Ukraine’s stock exchange was down 50 percent in 2012 as the worst MSCI performer, as the reinstated Prime Minister Azarov edged closer to formally joining the Russia-led Customs union with Belarus and Kazakhstan partially reviving the CIS grouping with the suspended IMF accord set to expire. Amid devaluation and default rumors he signaled “cooperation” with the Fund while assuring its money was not needed this year. Despite further sovereign ratings demotion a $1.25 billion Eurobond was placed in November to lift the country contribution to the buoyant EMBI return near 20 percent. International reserves dipped to $25 billion, less than three months’ imports, in the last quarter with the economy in recession. $10 billion in external debt payments come due in 2013, over half to the IMF and combined public and private sector foreign obligations are 75 percent of GDP. Domestic borrowing, which took 60 percent of the official total last year, has also skyrocketed on 20 percent increased state spending with the fiscal gap close to 3 percent of GDP. The Finance Ministry has dangled 20 percent yields and hard currency versions to lure bond buyers, and has now turned to retail potential with lackluster institutional appetite. The current account deficit more than doubled to 5.5 percent of GDP as metal exports slid 15 percent, and on the capital ledger foreign banks have withdrawn subsidiary support on flat loan growth. Parent banks anticipate a 20 percent hyrvnia drop against the dollar as the central bank rules out adjustment and ordered surrender of export earnings to bolster the peg.
High banking system NPLs also linger in Kazakhstan, an immediate Central Asia union backer, as a central asset-disposal agency is not yet functional. Oil and mining-led GDP growth will again be 5 percent in 2013 as the government acquired an additional stake in the huge Kashagan field. Agriculture and construction are uneven, and the succession to President Nazarbaev was further muddied with replacement of the prime minister, although his son-in-law remains the front-runner. FDI as a fraction of output tops all of EMEA and has facilitated exchange rate management within the 145-50 band to the dollar. The stock market staged a 25 percent rebound, and London-listed heavyweight ENRC has agreed to stricter corporate governance standards.
Sovereign sukuk are planned which could add the country to the regional NEXGEM contingent alongside Belarus and Georgia. The former was a top gainer last year as it skirted default with Russian aid and currency depreciation, although the Lukashenko regime remains under international sanction for human rights abuses. On the corporate side after 2012’s record volume Europe is again projected to see $50 billion in issuance mainly from higher grade quasi-sovereigns. The demand for new entrants may be relatively unabated with the yield hunt, shortage of industrial world paper, and crowded major EM positions uniting for the welcome.
