Alfa-Bank published Economic Review on Ukraine

29 June 2010, Alfa Bank (Ukraine) issued an Economic Report titled “Ukraine: No stopping for now!” dedicated to the major market trends and containing credit profiles of some Ukrainian bond issuers.

Summary:

• Overheated expectations about massive defaults proved to be unjustified. In spite of sharp market deterioration, none of Ukrainian Eurobond issuers (including sovereign) defaulted on the bond’s principal in 2009-2010. Heavy strain on servicing external liabilities resulted in a series of restructurings, easing the short-term external debt burden. Furthermore, negative expectations about FDI contraction turned out to be overestimated, NBU managed to gain control over FX rate even with an interrupted IMF support while sovereign risk spread continued to narrow rapidly

• Peers analysis demonstrates that existing sovereign ratings may be upgraded in the immediate future, while “BB” level is more appropriate for Ukraine now. Positive rating implications should induce the contraction of spread between YTM of Ukraine’s Eurobonds and yields of comparable LT sovereign Eurobonds. Hence, investments in Ukrainian assets should provide additional benefit by way of their price converging towards more reasonable intrinsic value

• Ukrainian economy is undergoing a period of change. Reducing the sharp UAH depreciation, growth in GDP, industrial and agricultural production, pacification of inflation rate and easing external debt’s burden helps Ukraine to restore its image in the eyes of potential investors over the world. Thus, at the beginning of 2010 a number of leading rating agencies upgraded their country’s ratings for Ukraine and changing their outlook from negative to stable or positive

• The major change in Ukrainian political structure this year was the election of V.Yanukovitch as Ukrainian president, accompanied by a dismissal of Y.Timoshenko from her position of Prime-Minister and the appointment of pro-presidential N.Azarov for this post. Despite the foreign experts’ fears of finishing the period of pro-western orientation, acting Ukrainian authorities take steps to further reformation and normalization of the economy. The major achievements of Mr.Azarov during his previous premiership was the ordering of public finance, continuation of reforms in industry and social sectors together with successful negotiations with international money donors

• New private external borrowings are feasible. Last year entailed the continuing de-leverage of private sector with a simultaneous increase of external public debt. But as soon as expectations about massive 2008-2009 defaults turned out to be groundless, investment sentiments towards Ukrainian risks significantly improved in 1Q10. Accompanied by rebounded economic growth, political developments and ratings upgrades, that paved the way for Ukrainian issuers to test the waters of Eurobond market. As a result, successful placements in April-May demonstrated that new private external borrowings are feasible already

• Authorities follow IMF recommendations. Given the adoption of 2010 state budget, Ukrainian government accounted for the IMF’s deficit margin (6% of GDP). The expected volume of deficit should be realistic under the pace of economic recovery, anticipated CPI growth and changes of primary fiscal balance. Deficit financing is relying on diversified sources on the domestic and Eurobond market mostly, while the international financial institutions should remain significant money donors and “initial signal” for investors to enter Ukrainian market

• UAH is strong now. Significant financial inflows and improving export proceeds allowed an excessive USD supply on the Ukrainian FX market, creating the conditions for slight UAH revaluation. The NBU took this occasion to replenish its currency reserves and to regulate the exchange rate in its own mode. As a result, the UAH appreciated merely by 1.0% during 2010 without any significant fluctuations. Thus, the NBU proved it has regained control over the situation on the currency market after the drastic UAH devaluation in 2008-2009

Alfa-Bank Ukraine (Alfa-Bank PJSC) is a universal commercial bank that is part of Alfa Group Consortium. The Bank holds leading positions in all segments of the Ukrainian banking sector. According to the National Bank of Ukraine statistics, the Bank is in TOP10 banks in terms of total assets and is among leaders in terms of customer accounts of legal entities and growth rate of retail customer accounts at the end of 2009.

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