UKRAINE: EQUITY / FIXED INCOME AUGUST 05, 2009 Stock market indexes 500 ASTRUM DAILY 450 MARKETS OVERVIEW : 400 The hryvnia outpaces stocks in retracement. Stocks dropped 0.3%- 0.4% as market players were not ready for a full-fledged decline. The hryvnia retraced 0.65% after appreciating for three trading days in a row. 350 ECONOMICS & POLITICS : 300 06.07.09 13.07.09 20.07.09 27.07.09 03.08.09 MinFin announces results of Monday's OVGZ auction. The demand PFTS UX* RTS* was limited, yield growth continued. The future of OVGZ placements in MSCI EM* S&P 500* DJ Stoxx 600* the next few months remains gloomy. * rebased to PFTS index Source: Bloomberg The government continues producing questionable fiscal data. The numbers of the state budget execution in 7M09 are dubious. The level of Stock market indexes state re-distribution in the economy grew to 36% of GDP while the Close 1D 1M YTD reported state budget revenues in 7M09 stand at just 43% of total state UX 1,087 (0%) 11% 43% budget revenues set for 2009. PFTS 430 (0%) 6% 43% RTS 1,074 1% 13% 72% Ukraine suffers the biggest industrial output decline among CIS MSCI EM 861 (0%) 12% 52% countries in 1H09. The deepest decrease in industrial output is related to DJ Stoxx 600 228 (0%) 12% 16% the structure of Ukrainian industry. Ukrainian industrial output should S&P 500 1,006 0% 12% 13% recover in 2H09 and FY09 industrial output decline should soften to 19%. Source: Ukrainian Exchange, Bloomberg Ukrainian Exchange (stocks) COMPANIES & INDUSTRIES : Ticker Close , 1D # of Three ailing banks on the road to recovery. The restoration of UAH trades solvency of Finance and Credit, Nadra Bank and Rodovid Bank should be Total stock market 396 POSITIVE for the banking system as a whole. Leaders by trade volume Ukrnafta UNAF 149.2 (0%) 73 Ukraine 7M09 steel pipes output down 42% y/y. Khartsyzsk Pipe Ukrsotsbank USCB 0.3 (0%) 101 (HRTR: BUY) was the market leader with 110% y/y growth. Raiffeisen Bank Aval BAVL 0.3 (0%) 40 Leaders in price growth Turboatom delivers equipment to La Yesca HPP: NEUTRAL. We Mariupol Illich SM MMKI 1.3 4% 2 accounted for the contract with La Yesca HPP in our Turboatom's financial Donbasenergo DOEN 39.2 2% 3 model and reiterate our BUY recommendation for the stock. Avdiivka Coke AVDK 7.8 2% 12 Stirol stops production of main fertilizers. We believe the Company is Leaders in price decline waiting for cheaper natural gas promised by the government in June and Luhanskteplovoz LTPL 1.9 (3%) 2 reiterate our HOLD recommendation for the stock. Forum Bank FORM 6.6 (1%) 19 Yasynivka Coke YASK 1.3 (1%) 8 Ukrainian coke output up 10% m/m in July. We expect that Ukrainian Source: Ukrainian Exchange pig iron and coke output will grow by just 2% m/m in August due a traditional slowdown in late summer. We reiterate the forecast of FY09 Fixed income, currency and commodities markets coke output at 17 mln tonnes, down 13% y/y. Close 1D 1M YTD Fixed income EMBI+ Global 364 (6%) (15%) (47%) EMBI+ Ukraine 1,043 (5%) (15%) (62%) CDS 5Y Ukraine 1,412 (1%) (17%) (56%) Ukraine - 11 11% (0.8 p.p.) (3.6 p.p.) (20.1 p.p.) Ukraine - 13 15% 0.0 p.p. 0.0 p.p. (11.8 p.p.) Forum - 09 17% 0.0 p.p. (5.8 p.p.) (29.9 p.p.) Ukreximbank - 09 26% 0.0 p.p. 3.9 p.p. (19.7 p.p.) Currency market UAH NDF 1M 7.84 (7%) (1%) (19%) UAH NDF 6M 9.34 0% (1%) (22%) UAH/USD 7.94 0% 3% (0%) UAH/EUR 11.42 1% 5% 1% UAH/RUB 0.25 1% 3% (4%) Commodities market Wheat, USD/bu. 5.7 (1%) 14% (10%) WTI CRUDE 71.4 (0%) 7% 41% Gold, USD/oz. 967.5 1% 4% 9% Source: Bloomberg Please see important disclosures at the end of the document www.astrum.ua [email protected] ASTRUM INVESTMENT MANAGEMENT / AUGUST 05, 2009 MARKETS OVERVIEW : The hryvnia outpaces stocks in retracement Following the decline in the European markets, Ukrainian indices retraced Tuesday by 0.3%- 0.4%. Although Ukrainian stocks are usually more volatile than the stocks on developed mar- kets, on Tuesday the decline of stocks in Europe by the close of business in Kyiv outpaced that of the Ukrainian stocks. Apparently, Ukrainian market players are not ready to sell as the opti- mism on the global markets persists and there are no critical domestic market drivers. The trade volume remains high – UAH 18.7m on the UX and UAH 4.6m on the PFTS on Tuesday. Yuri Belinsky [email protected] On Tuesday, the hryvnia retraced after appreciating for three trading days in a row. The Inter- bank FX Market closed at UAH/USD 7.9485-7.9840, with the hryvnia losing 0.65% against the USD. The National Bank of Ukraine was present on the market, selling US dollars at UAH/USD 7.75. Interbank FX Market UAH/USD rates 8.30 8.20 8.10 8.00 7.90 7.80 7.70 7.60 01.07 07.07 13.07 17.07 23.07 29.07 04.08 Oleksiy Blinov Bid Ask [email protected] Source: InterBusinessConsulting agency ECONOMICS & POLITICS : MinFin announces results of Monday's OVGZ auction On Monday, August 3, Ukraine’s Ministry of Finance placed UAH 11.6m worth of OVGZ. The bonds with 266 days circulation period and 28.1% yield were sold for a UAH 7.5m, while 980- day bonds yielding 28% were sold for UAH 4.1m. There was no demand for OVGZ with 343 days circulation period. Astrum’s perspective: The auction confirmed the land-slide change on the domestic govern- ment debt market. The demand for OVGZ was tiny, the growth of yield continued. As opposed to the previous auction, MinFin managed to place 9-months and 1.5 year bonds but the yield increased again. The sharp yield growth lead to the rise of attractiveness of OVGZ on the long end of the curve. The demand for the bonds redeemable in 2012 was at UAH 224m however MinFin placed just UAH 4m of these bonds. Apparently, MinFin did not want to pay such high yields for such a long time. We reiterate our view that in the next few weeks OVGZ placement potential is weak. The key constraints are the market players high devaluation expectations. Situation would change if the government bowed to the wishes of the market and offered high volumes of the bonds with 2-3 year circulation period and 28%-30% yields. However, this would critically raise the pressure on the state budget in 2011-12 which the government is trying to avoid. Sergey Fursa [email protected] ASTRUM DAILY 2 ASTRUM INVESTMENT MANAGEMENT / AUGUST 05, 2009 The government continues producing questionable fiscal data According to the State Treasury, 7M09 state budget revenues stood at 103.6% of the plan. All the key budget institutions – State Tax Administration, State Customs Service, and the Pension Fund – also reported 100%+ results. At the same time, the Secretariat of the President pointed that these optimistic reports are the result of significant adjustment of budget operational plans in the course of this year, and the revenue fulfillment rate is just 88.9% when comparing actual revenues with the initial fiscal schedule. Astrum’s perspective: We believe that the government is continuously using creative ac- counting methods in order to demonstrate that the state budget is under control. For instance, if one compares officially stated consolidated budget revenues to GDP in 1Q09, the level of state re-distribution in the economy stands at 36% of GDP. This result is very dubious because the ratio stood at 30%-32% in recent years while there were no significant changes in the tax system, domestic businesses ran into massive losses and partly moved into the shadow econ- omy. The reported state budget revenues in 7M09 stand at just 43% of total state budget revenues set for 2009, which actually points to strong under-performance, even keeping in mind that fiscal revenues usually increase by the end of the year. At the same time, there are some methodological puzzles that appeared recently in the Treasury calculations that make it even harder to assess real situation. Oleksiy Blinov [email protected] Ukraine suffers the biggest industrial output decline among CIS countries in 1H09 According to the CIS Statistics Committee, Ukrainian industry dropped the most among CIS countries in 1H09. Ukrainian industrial output contracted 31.1% y/y, while the average decline in the CIS stood at 15% y/y. Astrum’s perspective: The deepest decrease in the industrial output is due to the structure of Ukrainian industry. Ukraine has the largest share of steel and machinery, both in industrial out- put and industrial exports. These two industries accounted for up to 40% of the national in- dustrial output in 2008. These sectors are also the ones where global and domestic demand contracted predominantly due to massive investment cuts. Thus, these sectors, which form the backbone of the Ukrainian economy, faced massive sales decrease in terms of physical vol- umes. At the same time, other CIS economies like Russia and Kazakhstan have more significant orien- tation towards the oil and gas industry. Despite the fact that there was a comparable decrease in commodity prices, physical demand for commodities suffered much less than for metals and machines.