Stories in this Dispatch:
UBL TOP STORY

1. Yushchenko calls for new gas deal with Russia
2. Ukraine's unemployment rate drops sharply in March
3. Ukraine's population to fall by only 14,000 this year
4. Ukraine: The IMF Gives: Who Gains?

UBL NEWS

5. Forum Bank repays $115 syndicated loan
6. Market Comment: Market oversold
7. XXI Century to announce final Eurobond restructuring plans by April 30
8. Half of Ukraine's bond defaults caused by lack of cash for buy-back offers

UBL On the site today

9. COMMENTS: Are concerns about CEE indebtedness justified? Yes

UBL OTHER NEWS

10. Komsolmolets Donbassa Coal Mine to waive dividend payments
11. ZATR to supply 32 transformers to Central Asia in Q42009
12. SVGZ will supply Russian client with 300 mineral hoppers
13. Ukreximbank redeems $345m loan
14. Ukrainian oil at 18 USD/bbl, -65% to BRENT: NEGATIVE

UBL SECTOR SNAPSHOT

15. Sugar beet harvest to increase in 2009
16. Ukraine's banking sector NPLs grow to 3.7%

UBL MACRO RESULTS

17. Ukraine's Capital inflows strengthen in March thanks to foreign-owned banks but flight to foreign cash continues
18. Ukraine's external short term debt down $2.7bn in 1Q09
19. The risk of deflation across Europe is high (but not our central forecast)
20. Ukraine's current account posts deficit in February-March due to customs clearance of gas
21. Ukraine's Balance of payments deficit up 72.5% y-o-y in 1Q09

UBL COMPANY RESULTS, UPGRADES

22. Dniproenergo [Buy; FV $135.7] reports weak 1Q09 results
23. Dniprovagonmash reports strong 2008 results

Yushchenko calls for new gas deal with Russia

bne

April 24, 2009

Like a scab you cant resist picking, Ukrainian president Viktor Yushchenko called for a revision to the gas deal with Russia on Wednesday April 22, reports Interfax.

Yushchenko said that the current deal signed in January that brought the annual gas row to an end satisfied neither Kyiv nor Moscow.

"What was achieved in January 2009 is something that neither Ukraine nor Russia can be proud of. These relations have led to numerous frustrations. Unfortunately, the agreements that were achieved are cloning problems," Yushchenko said at a press conference the newswire reports.

The comments are partly aimed at undermining Ukrainian Prime Minister Yulia Tymoshenko who is a leading contender in the presidential elections due to be held in October who cut the deal that is a feather in her cap.

"It is necessary to address the issue of gas relations as openly as possible and pursue clear principles. We are not asking for any privileges but we want clear and plain market relations," Yushchenko said.

However, he has a valid point as under the terms of the deal Ukraine must pay for its gas each month and faces significant penalties if it is late with its payment. In March the national gas company Naftogaz only just scrapped together enough money to pay its bill and there were reports that it was going to struggle to pay the April bill earlier this month, although that payment went off without problems.

Despite the president's remarks, the government has already moved to make the monthly payments easier on Naftogaz, which asked the treasury to provide it with financing to cover the bill, rather than leaving the company to scrap the money together on its own.

According to a resolution proposed by the gas company, the treasury would provide the company with advance financing from a special fund in the national budget that would cover the difference between the purchase prices of imported gas and its sales prices to Naft! ogaz.

Currently the 2009 budget has UAH1.614bn earmarked for gas purchases, which the government plans to increase nearly five-fold to UAH7.725bn. The government estimates it needs UAH6.94bn this year to pay for gas imports, assuming Ukraine consumes 8.8bn cubic meters of gas this year at an import price of $179.50 per thousand cubic meters and an exchange rate UAH7.70/$1.


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Ukraine's unemployment rate drops sharply in March

bne

April 24, 2009

An increasing amount of good news has come out of Kyiv in the last few weeks. The latest sign of brighter days ahead was a sharp drop in the rate of unemployment in March, with the rate of rise in total number of registered unemployed falling sharply to 3.1% of the total workforce.

The rise in unemployment took off in October 2008 rising from 1.8% and accelerating over the Christmas holidays (November 2.3%, December 3%).

The slow down in the rise in the rate of unemployment and compares favourably to Russia where the rate of unemployment is still accelerating.

By the end of March 2009 some 879,000 people were unemployed against February with 906,100. Of the jobless, about just under three quarters, or 627,400 people, received unemployment benefits, which again compares very favourably with Russia where only one in three of Russia's jobless are registeded as unemployed and receive state help.

Among those registered as unemployed at the end of January some 475,500 were women, and most of the jobless (488,700 people) live in cities, reports Interfax.


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Ukraine's population to fall by only 14,000 this year

bne

April 24, 2009

Demographic decline is going to be a long-term break on growth for most of the countries in the CIS, but Ukraine is streets ahead of its neighbours on this score.

The population is falling, but is only expected to decrease by 14,170 people to 46.1m this year, according to the State Statistics Committee. For comparison, Russia, with a population of 142m, is expecting to loose some 600,000 people from its total population this year.

In January-February there were some 83,500 births and 128,000 deaths, of which 793 were children under one year old. The birth rate is 11.2 per 1,000 people, while the death rate is 17.2, reports Interfax. During the period 40,600 marriages were registered in Ukraine, and nearly 22,000 divorces. The total marriage rate is 5.6 per 1,000 people, while the divorce rate is 2.9 per 1,000.



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Ukraine: The IMF Gives: Who Gains?

Citibank, Russia

April 24, 2009

_ The Flexible Credit Line is arguably the most important innovation to come out of the IMF in many years, since it helps to answer a longstanding question: how can the Fund credibly help sound countries from being badly affected by global risk aversion?

_ Summary view - Sustained political focus remains elusive in Ukraine, leaving the economy increasingly vulnerable to the negative growth dynamic emanating from the industrial sector despite the recent recommitment to the IMF. A weakened banking sector, exposed to currency swings and in need of focused recapitalisation/consolidation efforts, ultimately underlines the risks to budgetary execution and the sustainability of the new IMF agreement.

_ Things to watch - The IMF staff have proposed equal installments of US$2.8bn for the 2nd and 3rd tranches, although both payments remain conditional on Board approval of Ukraine's progress under the First and Second Reveiews, respectively. In this election year, the authorities could find it difficult to maintain corrective policies, leaving us cautious on the timing of future IMF disbursements.

_ Strategy - Political risk, and hence economic risk, underlines our continued caution in the eurobond space, despite the recent EM-risk rally and low probability that we attach to a sovereign default scenario in 2009. That said, we see little so far in the economic fundamentals to sustain meaningfully tighter CDS spreads over the near-term. Only credible effort under the reinvigorated IMF programme will sustain tighter CDS.

Deeper recession expected, but inflation to remain elevated We expect Ukraine's economy to contract by just over 9% in 2009 as compared with our previous forecast of a 8.7% decline, but downside risks remain. This negative revision follows the release of weak 4Q08 data showing that the economy contracted by 8% YoY after growing by 6.4% in the previous quarter.

The year-end deterioration in growth was driven by declining! industr ial activity, which helped to bring overall growth down to just 2.1% in 2008 from 7.7% in 2007. We expect this dynamic to persist well into 1H09 as dampened global demand and weak domestic drivers of growth reinforce negative terms of trade effects. Indeed, industrial activity contracted by 30% YoY in March, in line with February's result, as the metals, chemicals and machinery sectors remained subdued. This decline in real sector activity will continue to have knock-on effects for unemployment and private consumption, posing downside risks to our current growth forecast beyond those inherent in the external environment.

Greater economic slack is unlikely to be reflected in much lower inflation this year. We expect inflation to remain around 17.5% YoY by end-December for a couple of reasons, including the nature of both the IMF programme (SBA) and the current budget outlook, as well as delayed pass-through effects from a weaker hryvnia. On the former, following the December SBA-encouraged boost to utilities prices, long-running energy subsidies will continue to be unwound over the next three years, providing scope for sustained price pressures. In addition, the authorities have recently introduced some measures to generate fiscal savings from pensions, utilities, excise duties and the sale of carbon trading rights to Japan. The sum of these measures is an adjustment of 1.5% GDP, enough, in the IMF's view, to make credible a 4% GDP target for this year's budget deficit, significantly wider than the balanced budget envisaged in the October SBA agreement. While this should help smooth the economic adjustment underway, it also opens the door to election-driven social expenditure, perhaps adding to sources of inflationary pressure.

External imbalances are slow to adjust Although the current account deficit should improve over 2009-10, sustained negative terms of trade effects suggest that the correction will remain slow to materialise through cooler domestic demand alone. The weak trade dynamic ! remained evident in February's data, which showed an overall monthly deficit of US$1.1 billion, inclusive of a gas-related 86% MoM increase in imports.

Indeed, most other goods imports were down markedly in both monthly and annual terms, but Ukrainian commitments to buy specific amounts of gas from Gazprom this year are likely to weigh on both trade and geopolitical dynamics as the economy contracts. Against this, exports contracted by nearly 43% YoY, while steel prices were flat during the month. Therefore, based on the 10% YoY fall in steel prices during March, we expect the trade mix to remain growth negative for most of this year, delivering an overall deficit of about US$8.9 billion for 2009. As a result, we expect the current account deficit to narrow to around 5% of GDP from close to 7.5% last year.

Weak trade and current account dynamics underscore the need for greater hryvnia flexibility. This is especially true in view of the need (under the SBA) to rebalance the drivers of growth away from a predominantly consumption-based mix to one that is more sustainable and based on external drivers. This could prove a difficult task for several reasons, including the current global slowdown, the inflation outlook in Ukraine and importantly, the reluctance of the National Bank of Ukraine (NBU) to permit further hryvnia flexibility.

Indeed, despite the central role for enhanced currency flexibility under the SBA, the NBU has limited the hryvnia's movements against the US dollar through a combination of direct FX interventions and weekly FX auctions (helping to take the net FX reserve position to nearly US$1 billion in breach of the end-March SBA target), moral suasion and most recently, an outright restriction on key FX operations in the forward and spot markets.

Further risks to the Hryvnia While we believe these moves are an attempt to contain the impact of FX balance-sheet effects, they also limit the (efficient) functioning of the FX market and are thus a key source of economic adju! stment. In this context, and aside from currency pressures stemming from the trade position, we believe there are a few key sources of FX pressure brewing domestically that could prove difficult to contain later this year and next. In particular, Ukraine's gross external debt is now in excess of US$103 billion, of which a sizeable portion (approximately US$38 billion from the private sector) must be serviced this year. Moreover, while the authorities report the flight of nearly US$12 billion from the banking sector from the onset of the crisis and this has now subsided, we believe risks to further euro- or dollarisation of the economy are significant, particularly as the freeze on the early withdrawal of time deposits begins to expire. Therefore, we believe the current stability of the hryvnia will give way to greater flexibility, with fundamentals currently pointing to the weak side.



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Forum Bank repays $115 syndicated loan

Sokrat, Ukraine

April 24, 2009

According to a statement from the bank, Forum Bank has fully repaid its $115m loan attracted in April 2008. According to a statement from the bank, Forum Bank has fully repaid its $115m loan attracted in April 2008.

Our view:

Taking into account the bank's ability to attract funds from credit lines provided by its majority owner, Germany's Commerzbank, this repayment was anticipated by the market and, thus we consider this news as NEUTRAL. We believe that today the ability to replace maturing public debt and withdrawn deposits with the mother structure's funds puts Forum, as well as a number of other foreign-owned Ukrainian banks, in an advantageous position compared to its Ukrainian-owned competitors.



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Market Comment: Market oversold

Alfa, Russia

Friday, April 24, 2009

The Ukrainian stock market's rate of recovery (the PFTS Index was up 3.7% yesterday) confirms that it was oversold during the bear market, and stock quotes are now returning to more justified price levels. There are no fundamentals behind the correction, apart from the technical adjustment of the market. The delayed privatization of Prykarpattyiaoblenergo and biased but disappointing balance of payments figures only confirm that there is no basis for such excessive optimism. During the continued upward adjustment to more justified levels, the most liquid names, including Enakievo Steel, Ukrnafta, Azovstal, and Ukrsotsbank, are pushing the market up, meaning the PFTS Index continues to outperform most emerging market indices. The PFTS Index is a world leader in terms of growth rates over the last two months, as fears that Ukraine could default die down.

Denis Shauruk



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XXI Century to announce final Eurobond restructuring plans by April 30

Galt &Taggart, Kyiv

April 24, 2009

XXI Century (XXIC LN) Chairman of the Board of Directors Lev Partskhaladze announced the company will likely present a final plan to restructure its US$ 175mn Eurobonds coming due in May 2010, but with a put option on May 24, 2009, to bondholders by April 30, according to Interfax. Partskhaladze said the bonds will likely be restructured through a combination of the two options proposed to bondholders earlier this week. The developer proposed that holders extend the maturity of the notes to November 2014 and accept an amortization schedule providing for repayment installments beginning in 2010. If holders are opposed to extending the maturity, they can accept a 42% cut in face value in exchange for equity warrants.



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Half of Ukraine's bond defaults caused by lack of cash for buy-back offers

bne

April 24, 2009

Half of the all the bond defaults in Ukraine so far have been caused by companies having insufficient funds to meet buyback offers, experts from the Kyiv-based Credit-Rating agency told Interfax.

The total sum of buyback offers not paid over the last six months was UAH185.5m the agency said, which account for 71% of the total outstanding bonds with a call option. As of early April, ten companies out of 18 failed to pay.

"In April-June 2009, bond holders could claim securities worth over UAH2.5bn for early buyback. By the end of the year, bonds worth UAH8bn could be claimed," reads the release.

Credit-Rating agency said that the scheduled payments on bonds for 2009 is nine times less that possible payments under early buyback offers.


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COMMENTS: Are concerns about CEE indebtedness justified? Yes

Neil Shearing of Capital Economics

April 24, 2009


• A number of commentators have suggested that concerns over huge debt levels in large parts of emerging Europe are overdone. Needless to say, we disagree for three reasons.

• The relatively sanguine view propagated by some analysts rests on the argument that debt levels in the East are still very low relative to West. Private credit is just 30-40% of GDP in some countries, compared with 295% of GDP in the US (see Chart 1). What's more, with the exception of Hungary, public debt levels are much lower than in the West.

• So does this mean the concerns we have raised about debt levels in emerging Europe are misplaced? We don't think so, for three reasons. First, Western debt levels are not necessarily a good benchmark for those in the East. For a start, high levels of indebtedness are the root cause of the current problems in the US and UK. What's more, notwithstanding this point, developed economies can generally support higher levels of debt as they have greater fiscal credibility.

• Second, it is not just the overall size of the region's debt that is concerning, but its structure. For a start, around two-thirds of household and corporate debt is held in foreign currencies (the exception being in Russia and the Czech Republic, where the bulk of debt is denominated in local currencies). Those countries with floating exchange rates have seen currencies tumble by more than 25% since the summer, with devastating effects on unhedged corporate and households. Meanwhile, those countries with overvalued fixed exchange rates (primarily in the Baltics) have been prevented from devaluing in order to restore competitiveness.

• What's more, the lending boom has been funded by borrowing from overseas at short maturities. While such data are subject to much uncertainty, the region must repay around $500bn of external debt this year, half of which is owned by banks (see chart 2). Support from parent banks co! uld fade as losses in the West continue to mount. More generally, banks, corporates and governments are likely to experience lower rollover rates given the weakness of global risk appetite. Hence, we have long-argued that IMF support will be needed to avert a surge in defaults.

• Finally, while overall debt levels might be lower than in the West, up until last year they were growing at a rapid pace (80% on year in some cases). This created huge macroeconomic distortions - current account deficits ballooned and asset price bubbles formed. Meanwhile, it is doubtful that risk management practices kept pace with the surge in lending.

• As the region slides into recession, bad debts could soar from around 3% currently to 10% or more. What's more, vulnerabilities in the banking sector and the real economy are likely to become self-reinforcing: as bad debts rise, banks will scale back lending, thus deepening the slump in the real economy and causing bad debts to rise even further. The bottom line is that concerns about indebtedness in emerging Europe are real and justified.

Neil Shearing is Emerging Europe Economist at Capital Economics



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Komsolmolets Donbassa Coal Mine to waive dividend payments

Foyil Securities, Ukraine

April 24, 2009

Ukraine's major thermal coal producer and flagship asset of DTEK holding, a daughter company of Ukraine's industry giant System Capital Management, held its AGM, at which the shareholders decided to waive dividend payments for 2008 (Source: Ukrnews).

Our view: The coal producer did not have a particularly good year in 2008, with net income coming in at just UAH 40.6m, or 42% below 2007's bottom line, and that is despite the price surge for T-grade coking coal over the first three quarters of 2008. This news is also interesting in the light of several other SCM-controlled companies also choosing not to pay dividends for 2008, and so we are making the assumption that the remaining companies of the group will not resolve to pay out dividends in their upcoming shareholders meetings either. We find the waiver logical and in line with our expectations, since System Capital Management is suffering from an acute cash shortage in order to finance its operations smoothly during this time of falling revenues.
Ismail Safaraliyev



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ZATR to supply 32 transformers to Central Asia in Q42009

Sokrat, Ukraine

April 24, 2009

On April 22, Zaporizhtransformator [ZATR UZ, N/R] - the world`s largest manufacturer of transformer equipment - announced that it will supply transformers to Central Asian countries in Q42009. On April 22, Zaporizhtransformator [ZATR UZ, N/R] - the world`s largest manufacturer of transformer equipment - announced that it will supply transformers to Central Asian countries in Q42009. A company press release states that ZATR has signed contracts with clients in Kazakhstan and Uzbekistan for the delivery of 32 transformers. In addition, the company expects to sign new contracts for another 11 transformers soon.

According to its 2008 results, ZATR produced 780 units of equipment, which is equal to 47 GWt, versus the 37 GWt produced in 2007. The company produces power transformers, power units, and systems for monitoring and controlling electricity grids. It exports to 83 countries around the world. Since 2001, ZATR has been a member of the Energy Standard Group, which includes a particularly large number of machine manufacturing enterprises and is headed by businessman Konstantin Grigorishin.

Our view:

This news is POSITIVE for Zaporizhtransformator. We confirm our POSITIVE view of ZATR. According to ZATR's CEO, Mr. Kleiner, the company currently has a significant order book, which is valued at USD 380 mln. with contracts which have been signed in 2009 valued at USD 90 mln. We are looking very optimistically on the prospect of new ZATR contracts in the coming year, based on previous agreements. In our view, the company has a strong position abroad and especially on the CIS market, where ZATR's market share was around 60% in 2008 and will remain at the 50-60% level in 2009. The key driver for ZATR is utilities' need to replace a significant amount of energy equipment, including power transformers. In our assessment of ZATR we see only two risks: firstly, client failures to pay for products or reschedulings that cause long delays in receiving! payment s for delivered products, and secondly, Mr. Konstantin Grigorishin's periodic involvement in political confrontations with the Ukrainian government.



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SVGZ will supply Russian client with 300 mineral hoppers

Sokrat, Ukraine

April 24, 2009

The Luhansk-based Stakhaniv Railcar Works [SVGZ UZ, U/R], one of the largest wagon producers in Ukraine and part of the AvtoKrAZ holding, announced that company has recently finished the production of 100 platforms for a Latvian railway and started the production of 300 mineral hoppers for a Russian client. The Luhanskbased Stakhaniv Railcar Works [SVGZ UZ, U/R], one of the largest wagon producers in Ukraine and part of the AvtoKrAZ holding, announced that company has recently finished the production of 100 platforms for a Latvian railway and started the production of 300 mineral hoppers for a Russian client. According to a statement issued by the press service of Stakhaniv Railcar Works, the value of the contract for the Latvian railway was USD 5.35 mln. Today SVGZ is trying to negotiate new contracts with this client and increase its book order for 2009. The company's management expects to produce about 1.8-2 thds. railcars in 2009 based on the current order track.

In 2008, Stakhaniv Railcar Works earned a profit of UAH 95.2 mln (USD 18 mln. U sing the average exchange rate in 2008 of 5.3/USD). At the same time, it reduced its production volume by 0.81% (or 45 wagons) YoY to 5,511 wagons. Kostiantyn Zhevaho`s Finance & Credit Group controls the AvtoKrAZ holding to which Stakhaniv Railcar Works is affiliated.

Our view:

This news is POSITIVE for SVGZ. As we wrote earlier (see our Daily on February 7) according to our information, the last huge contract (~2000 wagons) the company had, with the Russian independent leasing company Brunswick Rail Leasing (BRL), was finished in November 2008. This new announcement regarding the 100-platform project just completed and the new one for 300 mineral hoppers which we value at USD 12-13 mln. is definitely positive news for SVGZ. The company management's production expectations are almost in line with our assumptions that SVGZ's output will drop by 50-60% in 2009. However, the company will try to co! mpensate for this revenue drop through its metalware production segment. We do not expect a recovery in the demand for railcars any earlier than 4Q2009 or even 1H2010.

We have put SVGZ's stock under review and will be updating our recommendation soon.

For an in-depth analysis of Stakhaniv Railcar Works, see our report "Railcar Producers in the Spotlight - Buy Your Ticket on Time", issued by Sokrat in July 2008.



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Ukreximbank redeems $345m loan

Sokrat, Ukraine

April 24, 2009

According to a statement from the bank, Ukreximbank has redeemed a $345m loan attracted in April 2007. According to a statement from the bank, Ukreximbank has redeemed a $345m loan attracted in April 2007.

Our view:

We consider this news as NEUTRAL, since the strong support which Ukreximbank receives from its owner (the Ukrainian government) left no doubts about the successful repayment of the loan.



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Ukrainian oil at 18 USD/bbl, -65% to BRENT: NEGATIVE

Sokrat, Ukraine

April 24, 2009

On April 22, 220.6 thsd mt of oil was sold at Resources Auction 128, which took place on the floor of the Ukrainian Interbank Currency Exchange. On April 22, 220.6 thsd mt of oil was sold at Resources Auction 128, which took place on the floor of the Ukrainian Interbank Currency Exchange. According to UICE's official information, the average price of the oil was UAH 1,270 per mt (up 0.8% from the last Auction 127 on March 24), or USD 18.0 per bbl (excluding VAT, at USD/UAH 8.00, up 0.8%).

The total volume offered at Auction 128 was 417.5 thsd mt, 49.8% of which was sold.

The discount for the Ukrainian oil once again renewed record-highs, and amounted to 65.1% compared to BRENT and 63.9% to Urals.

The average price of natural gas condensate amounted to UAH 3,261 per mt (up a significant 22.4%), or USD 340 per mt excluding VAT (also up 22.4%). The total volume of condensate sold was 12.95 thsd mt, or 100% of the total volume offered.

About 94% of the oil and 57% of the condensate was offered by Ukrnafta [UNAF UZ, U/R], a major Ukrainian oil and gas producer and fuel retailer, which is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view:

NEGATIVE. The discounts at which Ukrnafta's oil is sold keep on increasing. Despite having strong exposure to the promising oil and gas business, Ukrnafta's sales performance does not react to fundamental drivers, such as the recent increase of world oil prices roughly from USD 40 to USD 50 per bbl.

We expect Ukrnafta to report weak 1Q09 results in the near future.

We have also gotten more worried about corporate governance risks associated with the corporate conflict between the State and the Privat Group. We also doubt that the Privat Group intends to improve the situation, even if it the conflict is resolved in its favor. Our attitude towards Ukrnafta's shares, which have recently experie! nced unr easonable growth, remains NEGATIVE.



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Sugar beet harvest to increase in 2009

Sokrat, Ukraine

April 24, 2009

According to the Ministry of Agriculture, the sugar beet harvest in Ukraine will rise in the 2009/10 marketing year and is expected to be 16.5 mln mt. According to the Ministry of Agriculture, the sugar beet harvest in Ukraine will rise in the 2009/10 marketing year and is expected to be 16.5 mln mt. In 2009, the area cultivated with sugar beets shrank slightly, by 0.5% YoY. Consequently, the expected increase in the sugar beet harvest is based on a possible sugar beet yield increase thanks to the implementation of modern technologies in the 2009/10 marketing year.

Our view:

We consider this news as MIXED, as we doubt that the increase is possible. Our assumptions are that in the best case the sugar beet harvest will remain at the 2009 level. According to earlier estimates made by the Ministry of Agriculture, domestic agrarians needed a total of UAH 5 bln to pay for the current spring sowing campaign.

Ukraine's banks have supplied UAH 1 bln. Nevertheless, the spring sowing campaign is gaining momentum and has already exceeded the level of the 2008 season.

Agrarians have cultivated a total of 4.4 mln ha as of April 22, 2009. However, we expect the lack of financial injections into farmer's working capital to worsen this year.

Thus the application of fertilizers and insecticides is highly questionable. We also have concerns regarding the quality and yields of the 2009 harvest.



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Ukraine's banking sector NPLs grow to 3.7%

Galt &Taggart, Kyiv

April 24, 2009

The share of non-performing loans (NPLs) in the banking system increased 0.72ppts in March to 3.7%, NBU data showed. The share of NPLs is up from 2.3% as of January 1, 2009. Total NPLs in March increased UAH 5.4bn (US$ 701mn) to UAH 28.0bn (US$ 3.6bn), and 55.2%, or UAH 9.9bn (US$ 1.3bn) YTD.



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Ukraine's Capital inflows strengthen in March thanks to foreign-owned banks but flight to foreign cash continues

Dragon Capital, Kyiv

April 24, 2009

According to NBU estimates, Ukraine's financial account deficit stood at $0.8bn in March, down from a revised gap of $1.1bn recorded in February, driven primarily by resident-based flight to foreign cash.

(NBU) Notably, the NBU said net inflows of mid- and long-term borrowings remained strong last month, reaching $1.2bn (up from $0.3bn in February) mostly on account of foreign-owned commercial banks that attracted $1.1bn of debt. This fully offset $1.2bn of short-term loan outflows, implying a 100% total debt rollover rate in March. The NBU estimated the 1Q09 rollover rate at 88% for the banking sector and at 114% for the corporate sector. We view this as a very encouraging sign but do not rule out the rollover ratios may deteriorate somewhat in the coming months, especially in the banking sector.

At the same time, the NBU said flight to foreign cash continued in March, albeit at a more moderate pace, with F/X cash outside the banking system rising by $1.1bn last month compared to a $2.1bn increase in February.

Olena Bilan



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Ukraine's external short term debt down $2.7bn in 1Q09

Alfa, Russia

Friday, April 24, 2009

Ukraine continues to successfully manage its short-term debt obligations, making external payments at half the rate expected at the outset of the crisis.

Thus, its short-term debt outstanding was $19.3bn as of the first of April against $21.9bn as of January 1. We do not expect the redemption rate of less than $1bn a month to change this year, as Ukrainian banks and corporations have a good opportunity to refinance at least half of their ST external obligations, so ST debt outstanding as of the end of the year should fall below $10bn, according to our estimates. NBU reserves as of April 1 declined to $25.4bn, which covers ST debt obligations even if we subtract the amount of the first tranche of the IMF loan.

Denis Shauruk



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The risk of deflation across Europe is high (but not our central forecast)

Goldman Sachs

April 24, 2009

Large gains in Euro-zone flash PMIs for April make us increasingly confident that the worst, in terms of the pace of activity contraction, is behind us. Yet the same surveys still point to continued retrenchment of activity in Q2. We expect the output gap to continue to widen in coming quarters, depressing pricing power and profits.

We do not expect deflation to materialise in the Euro-zone or in the rest of Europe. Consumer price inflation has fallen sharply since the autumn but our central expectation is that this fall will be temporary. Yet the balance of risks to this expectation lies clearly on the downside, as shown by the very high readings of our new European Deflation Risk Indicator.

In a cross-country comparison, the indicator ranks Switzerland as the economy most at risk of deflation, followed by the Euro-zone and Sweden. The risk of deflation in the UK is notably smaller. Deflation is a monetary disorder with potentially large and protracted economic costs: its increasing likelihood merits aggressive monetary policy action, even if it is not considered as the central scenario. Our European equity strategists find that deflation surprises have historically been associated with a higher ERP across the asset class. Deflation also depresses earnings and raises the real value of debt. Among sectors, deflation would likely be bad for indebted companies, commodity-related areas and cyclicals. Banks would suffer as bankruptcies would rise further. Defensives and those with strong balance sheets would perform best.

PMIs: Emerging from the trough The key release of the week was the April flash PMIs. It brought good news: both indices were up over 2 points this month, enough, on past form, to suggest the trough in the index is behind us. However, the indices are still very weak and consistent with another negative GDP print at the start of Q2.

The Manufacturing index jumped to 36.7 after 33.9, the highest level since October a! nd the b iggest month-onmonth increase on record. Services increased to 43.1 after 40.9, again the highest reading since October. This left the composite index at 40.5 after 38.3. The French and German flashes showed a similar improvement: in the manufacturing PMI, Germany came in at 35.0 after 32.4 in March (this is still a very weak reading, similar to November's) and the French index was at 40.0 after 36.5 in March. In Services, Germany was 43.5 after 42.3 in March; France 46.2, after 43.6.

Several aspects in the report are worth highlighting. __ First, the orders/inventory ratio, a good very shortterm leading indicator of IP, continued to rise: up to 85.8 after 68.4 and now well above the historical low of 52.2 posted in December. Unlike last month, the rise was due to a sharp increase in order books (up to 37.4 after 30.9), but rapid destocking is still playing a role (43.6 after 45.3).

__ Second, employment indices, which tend to lag activity indicators, picked up in the manufacturing sector (34.5 after 33.9) but dipped in services (43.3 after 43.7).

__ Third, prices charged indices picked up after 8 months of declines (but remain at very low levels): they were up to 39.2 after 38.2 in manufacturing and 40.5 after 40.2 in the services sector. This is still consistent with very low price pressures but disinflationary forces may be just starting to ease.

The scale of the improvement is significant. Increases of 2 or more points in the PMIs are very rare (although we acknowledge it comes from a low base). They are particularly encouraging in the sense that these diffusion indices show a great degree of inertia and once they start moving in a different direction they rarely relapse. We have found we need a 2-point increase from its trough in the manufacturing PMI index, and a 3.5-point increase in its services counterpart, to be highly confident that the troughs are definitively behind us (see Chart 1 below from the European Weekly Analyst of February 19, 2009). This month's releases! mean we are past these thresholds for both PMIs and the worst now appears to be behind us.

Despite the increases, the overall level of the indices is still very weak and consistent with GDP contracting further at the start of Q2 - our survey-based indicator points to a contraction of -0.8%qoq. However, the correlation between growth and the surveys has weakened as the PMIs reached more extreme territory, so IP remains the indicator to watch to calculate the exact magnitude of growth.





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Ukraine's current account posts deficit in February-March due to customs clearance of gas

Dragon Capital, Kyiv

April 24, 2009

The NBU revised its estimate of February's current account (C/A) balance to a deficit of $1.0bn from a surplus of $78m released before and said the C/A deficit in March stood at $0.4bn, bringing the 1Q09 gap to $0.9bn (vs. -$3.7bn in 1Q08). (NBU) The C/A ran a deficit in February-March due to the inclusion in import statistics of so called technical gas that Naftogaz Ukrainy received from Gazprom as payment for the transit of Russian gas to Europe. Out of the total technical gas volume of 11 bcm, 6.3 bcm passed customs clearance in February and another 4.7 bcm in March, adding $1.0bn and $0.7bn to monthly imports, respectively. Net of the technical gas imports, March's C/A balance was positive at $0.3bn. Combined with January's $0.6bn surplus and a near balance in February, this implies an (adjusted) 1Q09 C/A surplus of $1.0bn. The inclusion of technical gas in C/A statistics was matched by an equivalent upward revision of the financial account balance.

Other than that, March's C/A data point to the continuation of positive trends seen in 2M09.

Merchandise exports fell 41% y-o-y last month to $3.3bn, improving somewhat m-o-m on higher sales of steel and machinery. At the same time, the decline in imports (adjusted for technical gas) deepened to an estimated 58% y-o-y, to $3.2bn, from -56% in February.

As our forecast accounts for the technical gas imports, we maintain our full-year C/A deficit projection at $1.4bn (1.4% of GDP).

Olena Bilan



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Ukraine's Balance of payments deficit up 72.5% y-o-y in 1Q09

Alfa, Russia

Friday, April 24, 2009

According to preliminary data from the National Bank of Ukraine, Ukraine's 1Q09 balance of payments deficit rose 72.5% to $5.2bn vs. $3.1bn in 1Q08.

Ukraine ran a current account deficit of $882m and capital account deficit of $4.2bn. Despite the disappointing numbers, expectations that there will be a substantial improvement in the trading balance this month still persist, as the $5.2bn balance-of-payments deficit in 1Q09 resulted from two main factors that will not be around in the second quarter. The first was recognition of Rosukrenergo gas by Naftogas Ukraine, which added $1.8bn to the trade deficit in 1Q09. Otherwise, that deficit would have been about $1bn. The second source of the BP deficit was an increase of $4.2bn in holdings of "currency outside banks", which means increased holdings of US dollars by households. The process of massive purchases of dollars also stopped in late March, and as of mid-April demand for foreign currency had declined by 80% compared to March. Thus, April data should demonstrate drastically improved BP figures, which is confirmed by the IMF and our own estimates.



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Dniproenergo [Buy; FV $135.7] reports weak 1Q09 results

Dragon Capital, Kyiv

April 24, 2009

Dniproenergo has reported poor 1Q09 results, posting a 51% y-o-y decrease in net sales, to $123m, a 90% slump in EBITDA, to $2.6m, and net losses of $5.9m (down from $6.6m NI in 1Q08) on a 34% y-o-y electricity production cut, to 3.2 TWh, and 40% y-o-y hryvnia depreciation. (Company) In addition, the GenCo's margins were hit by a market regulator-ordered tariff freeze and higher fuel prices. We expect Dniproenergo to post weak second-quarter results, with recovery in 2H09 conditioned on the regulator's willingness to increase tariffs.

Dennis Sakva



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Dniprovagonmash reports strong 2008 results

Dragon Capital, Kyiv

April 24, 2009

Railcar producer Dniprovagonmash, has reported strong 2008 results, posting net sales of $269.0m (+73% y-o-y), EBITDA of $46.0m (+45%) and net income of $31.1m (+54%). The company reported EBITDA and net margins of 17.1% and 11.6% (-3.3pp and -1.5pp y-o-y, respectively). (Company) Dniprovagonmash produced 3,253 railcars in 2008 (-1% y-o-y and 11% of total domestic output), including 1,620 open cars, 250 hoppers and more than 1,300 platforms.

Along with other domestic railcar producers, Dniprovagonmash was hit by a plunge in demand in 4Q08, having produced a mere 250 railcars over the period (-42% y-o-y and -76% q-o-q) and shortened its working week to three days. We expect no material improvement in Dniprovagonmash's performance this year.

Taisiya Shepetko



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U.S.-Ukraine Business Council (USUBC)
The bne Ukraine Daily List for Thursday, April 23,  2009  in cooperation with the U.S.-Ukraine Business Council (USUBC),Washington, D.C., www.usubc.org, is distributed to all USUBC members.  Subscription information for the bne (Business New Europe) publications including their magazine can be found by clicking on: www.BusinessNewEurope.eu.
============================================
Mr. E. Morgan Williams, Director, Government Affairs,
Washington Office, SigmaBleyzer,
Emerging Markets Private Equity Investment Group;
President/CEO, U.S.-Ukraine Business Council (USUBC)
Publisher & Editor, Action Ukraine Report (AUR)
1701 K Street, NW, Suite 903, Washington, D.C. 20006
Telephone: 202 437 4707; Fax: 202 223 1224
Ukraine Mobile: 380 50 689 2874
mwilliams@sigmableyzer.com; mwilliams@usubc.org
www.sigmableyzer.com; www.usubc.org