Economic outlook for 2018 – more bumps in the road?

Special
1 Please note the risk notifications and explanations at the end of this document
Fokus Eurozone
non-periodical 25 January 2018
Macro FI CEE SpecialMacro FI CEE Special
UkraineUkraine
Introduction: Our baseline scenario
The year 2017 has been more stable and partly more positive for Ukraine than
some might have expected. Economic growth at 2% yoy was not overwhelmingly
strong, but investment and consumption shot up considerably, and the fallout
from the Donbas blockade has been less harmful to the overall economy than
anticipated. There has not been any major political crisis despite the weak
coalition supporting Premier Groysman. The conflict in Donbas dragged on, but
there has been no major escalation. The currency was broadly stable, the IMF
disbursed one loan tranche and the FX reserves increased to a more reassuring
level. On a positive note, Ukraine managed to return to the international capital
market after several years of lack of access, issuing Eurobonds worth USD 3 bn,
using half of the amount to ease the debt service schedule. Most importantly for
Ukrainians, citizens gained the possibility to travel to the EU without a (tourist)
visa.
However, there have been also some developments which cloud our outlook
for 2018. The pace of reforms slowed down substantially with some necessary
reforms delayed (anticorruption and an adjustment of gas prices) or half-heartedly
implemented (pension reform). The relations between Ukrainian authorities and
international organizations like the IMF or the EU (and the reform oriented parts
of civil society) cooled down, especially toward the end of the year. In particular,
a dispute with the IMF on a gas price formula, a row with the EU on the ban of
roundwood exports and juridical attacks on the anti-corruption bureau (NABU)
and the unwillingness to establish a fully independent anti-corruption court led to
substantial irritations in the relations.
Given this situation, projecting the development in 2018 is a challenging task.
Key questions are
 if the current IMF programme will be continued, delayed/frozen or even of-
ficially cancelled ahead of the official target date in 2019, leading to a wor-
sening of external financing conditions in 2018, i.e. less official and possible
private inflows and thus a drag on FX reserves. This would also impact on the
post-program relations with the Fund;
 if the politics of a pre-election year – in 2019 both parliamentary and presi-
dential elections are scheduled – will lead to strong political turbulences (pos-
sibly even triggering early elections) or at least a further decrease in capacity
of authorities to act in a constructive way with foreign and domestic partners;
 and finally, if there will be any deterioration of the conflict situation in Donbas.
Financial analysts, RBI Vienna
Andreas Schwabe, CFA
andreas.schwabe@rbinternational.com
Gintaras Shlizhyus
gintaras.shlizhyus@rbinternational.com
Financial analyst, Raiffeisen Bank
Aval JSC, Kiev
Sergii Drobot
sergii.drobot@aval.ua
Editor, RBI Vienna
Gintaras Shlizhyus
gintaras.shlizhyus@rbinternational.com
 After a rather stable 2017, 2018 could become bumpier as elections and debt payments loom in 2019
 Relations with foreign partners more strained on limited reform zeal and less patience of partners
 Baseline scenario of moderate growth, somewhat weaker UAH and a return to single digit inflation
 No rating and outlook change expected; tight Eurobonds spreads might see a correction in the short run
Economic outlook for 2018 – more bumps in the road?
0
1
2
3
4
5
6
7
upaid**
2019
2021
2023
2025
2027
2029
2031
2040
Sovereign USAID Quasi-Sov IMF
Ext. public debt redemption schedule
USD bn
*Principal and interest payments
Source: IMF, Bloomberg, RBI/Raiffeisen RESEARCH

Special
Our baseline scenario for Ukraine
in 2018 is a cautiously optimistic.
We expect the IMF program to
stumble on in 2018, with the major
disagreements either at least partly
resolved or postponed. While
authorities will continue to only partly
fulfil conditions and do not make
much progress or even somewhat
reverse in certain areas (anti-
corruption and land reforms are hot
candidates), the IMF might still back-
off from completely terminating the
program. Alternatively, if the IMF does
not yield, Ukrainian authorities may
disgruntledly meet sufficiently the IMF
demands to prevent a full rupture. In
both cases, later in 2018 one tranche
could be disbursed, also keeping the door open to other IFI funding and continued
market access. Likewise, while the positioning of politicians ahead of elections
will increase noisy (in)fighting, a political crisis leading to early elections can be
avoided. Finally, we assume that there is no significant change to the situation in
Donbas – neither to a negative nor to a positive side.
However, there is a non-negligible risk that the assumptions underlying our
baseline scenario will not be fully met and one or more turn out too optimistic.
This poses a risk to the successful macroeconomic stabilisation of Ukraine of
recent years and the continuation of the economic recovery, the exchange rate
and the valuation of Ukrainian assets (including Eurobonds) already in 2018
or in subsequent 2019, when external debt payments rise and elections are
scheduled. Moreover, it would make issuing new external debt more difficult
or expensive. While probability estimates are rather speculative, we perceive
substantial downside risks to our baseline scenario of least at 20 to 30%.
The economy – review of 2017 and outlook for 2018
The beginning of 2017 was quite tense – the introduction of an economic
blockade of parts of the Donbas region (i.e. stopping the trade between Ukraine
and the territories uncontrolled by the government) weighted on industrial output
from Jan-Feb. Specifically, the decline in mining industry led to a reduction
in coke production and energy sector. By contrast, favourable global price
0
-6,6
-9,8
2,3 1,9 2,5
-20
-15
-10
-5
0
5
10
2013 2014 2015 2016 2017e 2018f
Consumption Investment Change in inventories
Net export GDP (% yoy)
Contribution to GDP growth (pp)
Source: State Statistics Service of Ukraine; RBI/Raiffeisen RESEARCH
4.4
2.2
2.0
8.7
1.1
4.4
8.5
6.8
2.0
2.7
6.3
2.8-15.0
17.4
4.3
6.6
-0.4
7.3
-20 -10 0 10 20
Food
Light industry
Woodwork and paper
Coke, refined products
Chemical
Pharmaceutical products
Rubber/plastic/mineral prod.
Metallurgy
Machine building
2016 to 2015 2017 to 2016
Manufacturing growth by sector (% yoy)
2.8
-0.2
4.3
2.5
-0.1
-5.8
4.0
-6.5
-8 -6 -4 -2 0 2 4 6
Industrial prod (total)
of which:
Mining
Manufacuring
Utilities
2016 to 2015 2017 to 2016
Industrial output growth by sector (% yoy)

Special
dynamics supported metallurgical
production, and this sector showed
only a minor downturn. Due to
adverse weather conditions in
spring, the harvest was slightly lower
compared to previous year, and
agriculture showed a reduction by
2.7% yoy in 2017. Nevertheless,
the financial situation of agricultural
producers improved considerably
owing to rising global prices. This,
in turn, caused significant investment
demand. Machine building output
rose by 7.3% yoy last year. Moreover,
food production, light industry and
chemical industry showed good
results as well. Economic stabilization
and high domestic investment activity pushed construction up by more than 20%
yoy, while growth of real wages after a twofold hike in minimum wage on 1
January 2017 assisted to significant improvement of trade.
Meanwhile, a rise in minimum social standards (like doubling the minimum
wage) was favourable for a number of consumer oriented economic sectors, but
had reverse effect on price stability by boosting private household demand. In
addition, prices were hit by reduced supply of some products to the domestic
market due to lower harvest and increased exports on the back of expansion
of producers to foreign markets. Inflation accelerated from 12.4% yoy eop in
2016 to 13.7% yoy in 2017 (13.9% yoy and 14.4% yoy avg respectively) with a
spike at 16.4% yoy in September. Given the growing risk for price stability, the
National Bank of Ukraine shifted to a tighter monetary policy, and after cutting
the key policy rate by 150bp in H1, it had to hike it again by 200bp to 14.5%
later the year. In Jan-18, the regulator increased the rate by 1.5pp to 16%
showing its concerns about sharp increase in social standards by the government
and significant delay of IMF financing.
The Military conflict in Donbas and collapse of living standards in recent
years triggered migration processes which continued also in 2017. Ukraine’s
population fell by about 180 thousand people to 42.6 mn people in 2017.
In Jan-Sep, the labour force declined by 0.5%. Thus, a growing labour deficit
is one of the factors that pushed average wage up by about 35% last year
(together with the hike of the minimum
wage) and contributed to the risks
for price stability. In the same time,
the unemployment rate remains high
at around 9.5-10%, but the indicator
is of low reliability, and can still be
explained by the high share of the
shadow economy in Ukraine.
The FX market was comparably stable
in 2017. The USD/UAH rate moved
according to our expectations and
mostly along the well-known seasonal
pattern. In Jan-17, the UAH was under
the pressure due to traditional boost
of budget expenditures at year-end.
However, high global prices and
a seasonal improvement of trade
7.4
1.6 0.1
0.8 0.2 0.5
2.0
0.3 0.1 0.2 0.4 0.3 13.7
0
2
4
6
8
10
12
14
16
Foodstuff
Alc./cig.
Clothing
Energy/utilities
Durables
Healthcare
Transport
Commun.
Leisure
Education
Catering
Other
CPI
Contribution to inflation Dec 2016 - Dec 2017
0
5
10
15
20
25
30
35
40
45
50
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Inflation CPI (% yoy)
Range
Target
12%±3pp 8%±2pp
6%±2pp
5%±1pp
Inflation development and NBU targets (%)
Source: State Statistics Service of Ukraine, National Bank of Ukraine, RBI/Raiffeisen RESEARCH

Special
balance led to the gradual decline
of USD/UAH rate to about 25.40 by
the end of August. In fall, elevated
devaluation expectations together
with high energy imports (partially
due to coal deficit and partially due to
seasonality) started to push USD/UAH
rate up. Finally, similar to the previous
years, budget expenditures were not
evenly distributed over the year, and
we saw sharp intensification of budget
spending in the very end of 2017.
The result was additional pressure in
the FX market and the USD/UAH rate
above 28.00 in the last day of 2017.
Despite having a weaker UAH
compared to 2016, gross inter-
national reserves increased by 21% last year and reached USD 18.8 bn (the
equivalent of 3.6 months of imports). The major contributors were financial
support of international partners and significant FCY purchase from the market
by the regulator during the periods of UAH strengthening. In 2017, the Current
Account (C/A) was driven by opposing factors – high global prices for steal and
agricultural goods notably supported exports, but imports rose as well due to
higher consumption and significant energy imports on the back of the blockade
in Donbas (this led to coal deficit in the domestic market). We estimate the C/A
deficit at about 3.4% of GDP in 2017 versus -3.7% in 2016. The major trade
partners of Ukraine were the EU and Asian countries that occupy more than 60%
of total turnover. Interestingly, despite the mutual restrictions, trade with Russia
improved in Jan-Nov – turnover increased by 0.7pp to 11.7%. This improvement
has been partially caused by import growth from Russia by 38.6% yoy due to
coal production shortages in the domestic market.
According to our estimate, GDP growth in 2017 decelerated from 2.3% in 2016 to
1.9%, but the economic blockade hit the GDP figure much lower than we initially
expected thanks to favourable global price dynamics. For 2018, we anticipate
GDP growth at 2.5% yoy that will be supported by growing consumption on the
back of another round of increases in minimum social standards. Moreover, given
that 2018 is a pre-election year, we expect higher government expenditures.
Investments will continue to grow, but slower than in 2017, as the urgent
investment demand was satisfied in
2016-2017, while a signiﬁcant inﬂow
of FDI is not expected due to the slow
moving reform process. In our view,
the effect of blockade will gradually
fade, and we will see increase of
industrial production by about 4%
yoy. This will boost exports in real
terms, but taking into account rather
unfavourable for Ukraine commodity
price forecasts, we expect a notable
deceleration of growth in nominal
terms. At the same time, imports will
continue to grow overtaking exports
given the traditional strong increase
in demand for foreign goods during
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Average wage growth rate Real wage growth
Growth of real vs. nominal avg. wage (% yoy)
Source: State Statistics Service of Ukraine, National Bank of Ukraine, RBI/Raiffeisen RESEARCH
23
24
25
26
27
28
29
30
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2016 2017 2018
USD/UAH exchange rate seasonal pattern
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH

Special
periods of economic recovery in
Ukraine.
Nevertheless, the floating exchange
rate will be a key means of external
adjustment and keep the size of the
C/A deficit contained at projected
4.2% of GDP in 2018. As of FX
market, we believe that USD/UAH
rate will follow the seasonal pattern
of previous year. The underlying
fundamental picture (imports rising
faster than exports, not much
capital inﬂows and expected higher
political risks) is skewered to some
depreciation of the UAH in 2018.
Thus, we would not be surprised to
see the USD/UAH rate on average
higher than in 2017. For the end of 2018 we currently project a value of USD/
UAH 28.50. Finally, higher minimum social standards will press the consumer
prices in 2018, and we expect average CPI growth of 9.2% yoy for 2018 versus
2017. This fact will force the regulator to pursue tight monetary policy and keep
key policy rate at relatively high levels for most of the year. However due to
a statistical base effect and assuming no price shock in H2 2018, the inflation
rate could fall substantially towards the end of 2018. This effect, supported by
a sound monetary policy could help to reach the inflation target of 4-8% yoy at
the end of 2018.
The political picture – back and forth
The political situation remains quite volatile. The ruling coalition has only a
weak majority that is a significant obstacle for passing reforms. Moreover, the
upcoming elections in 2019 (Presidential elections are expected to be held in
spring followed by parliamentary elections later that year) have become already
a focus of politicians causing a turn towards populism that is harmful for the
reform process and elevates risks for price stability. As of presidential elections,
according to different opinion pools, the favourites are now incumbent President
Petro Poroshenko and the leader of one of opposition parties Yulia Tymoshenko.
However, while Ms. Timoshenko has a fervent core followership, her potential to
add sufficient additional voters is seen limited. For Mr. Poroshenko, scoring quite
weakly in recent ratings, some see
more possibilities to attract undecided
voters at the elections date. Notably,
former president of Georgia Mikheil
Saakashvili has recently intensified
his political fight against the ruling
power (and specifically against the
President). However, despite his
regular media presence, he is now
less popular then the two candidates
mentioned above and no serious
contender for the presidential office.
Despite all obstacles, Ukraine
managed to receive fourth IMF
tranche of USD 1 bn and second EU
tranche of EUR 600 mn in spring 2017.
Thus, the cumulative disbursements
-5
0
5
10
15
20
Jan-14Oct-14 Jul-15 Apr-16Jan-17Oct-17
Gross FX reserves Net FX reserves
Gross vs net* international reserves
* XXXXXX, in USD bn
Source: National Bank of Ukraine, RBI/Raiffeisen
RESEARCH
5
8
11
14
17
20
-4.000
-3.000
-2.000
-1.000
0
1.000
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
USD mn
USD bn
NBU interventions/auctions Gross FX reserves, r.h.s.
Gross international reserves and NBU interventions (USD)
0,0
0,5
1,0
1,5
2,0
2,5
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Index for Monitoring Reforms (iMoRe) shaws decline
Source: Vox Ukraine, RBI/Raiffeisen RESEARCH

Special
12.1
9.2
8.8
7.4
7
6
6
4
3.2
19.7
16.6
Fatherland
Petro Poroshenko Bloc
For life
Civil Position
Self Reliance
Opposition Bloc
Radical Party
Servant of the People
Freedom
Another party
No defined position
0 10 20 30
Poll: If parlamentary ellections took place*
*held on 15-19 December 2017
Source: Democratic Initiatives Charitable Foundation, RBI/Raiffeisen RESEARCH
20
40
60
80
100
120
140
160
Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17
LCY PI deposits FCY PI deposits
LCY CO deposits FCY CO deposits
Deposit stock (indexed, Dec-13 = 100)
12.1
10.2
7.8
7.7
6
5.2
4.9
26.9
19.2
Tymoshenko
Poroshenko
Hrytsenko
Rabinovich
Lyashko
Boyko
Sadovyi
Another candidate
No defined position
0 10 20 30
Poll: If presidential ellections took place*
*held on 15-19 December 2017
Source: Democratic Initiatives Charitable Foundation, RBI/Raiffeisen RESEARCH
20
30
40
50
60
70
80
90
100
110
LCY CO loans FCY CO loans
LCY PI loans FCY PI loans
Loan stock (indexed, Dec-13 = 100)
amounts to about 48% of total financing under 4-years Extended Fund Facility
(EFF) program started in March 2015. This means that Ukraine is noticeably
behind the IMF schedule, which mirrors the state of reforms in the country. If
there is still time until the end of the EFF program, the latest Macro-Financial
Assistance (MFA) program with the EU has expired at the end of 2017. As a
result, Ukraine drew only 2/3 of available funding. This hints at an insufficient
fund absorption capability of Ukraine. Moreover, mismanagement of the offered
means (not only from the EU and IMF, but also from the World Bank and other
international organization) due to slow reforms, high bureaucracy and lack of a
clear development strategy is an issue.
On the positive note, while slower than planned, the structural reforms are
still progressing. Ukraine recently adopted a pension reform, a new law on
privatization and a law on the reintegration of Donbas. Meanwhile, the to-do-list
is signiﬁcant and even growing: launching a successful privatization process of
state owned enterprises (SOE), anticorruption court legislation and adjustment of
domestic gas prices to import prices. Land reform is an important topic as well.
In addition, the recently adopted pension reform still needs some adjustments –
according to the IMF, “the pension law introduces some important provisions to
modernize the pension system in Ukraine but also has some shortcomings that
undermine incentives for people to work longer and contribute to the system and
it does not fully ensure a fair and sustainable pension system so we think a bit
more work needing to be done there”. Moreover, a law on the establishment of a

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State banks
55%Foreign banks
31%
Private Ukrainian
banks
13%
Insolvent banks
1%
Market share* (as % of assets)
*as of 01.10.2017
70.2%
43.4%
24.2%
58.4%0
100.000
200.000
300.000
400.000
500.000
600.000
State banks Foreign banks Private
Ukrainian
banks
Insolvent
banks
Performing loans Non-performing loans
Quality of loan portfolio* (UAH mn)
*as of 01/12/2017
dedicated anti-corruption court drafted by the President has
been criticized by the Fund (and other institutions), as there
are “concerns about the consistency of several provisions in
the draft law with Ukraine’s commitment under the program
and the recommendations of that Venice Commission”.
On the back of significant FCY debt payments during the
next few years (USD 7-8 bn per annum), cooperation with
the IMF is still of high importance for the country. Firstly, this
gives large volumes of financing at relatively low interest
rates. Secondly, the EFF program serves as a driver and
anchor of reforms in the country, which will help to attract
FDI in the future. Finally, an ongoing cooperation with the
IMF is key to the confidence of (foreign) financial investors
in Ukrainian assets. Given the lower debt repayments after
the external debt restructuring in 2015 and the successful
macro-financial stabilisation of recent years, Ukrainian
authorities might have become too complacent, increasing
the risk of derailing the IMF program.
Generally, we expect only still one IMF tranche in 2018, as the requirements
looks reachable in the upcoming months. As for subsequent portions of financing,
Ukraine will have to approve a land reform that is politically painful especially
before the elections. Thus, the realization of this reform is unlikely in 2018.
Nevertheless, in our base case scenario, Ukraine will make efforts to continue
cooperation with the IMF, but will constantly face obstacles in the form of
populism.
Banking sector development
In 2017, another 14 banks left the market totalling 94 since 2013. As a result,
there were only 82 operating banks as of 1 January 2018. Moreover, the capital
adequacy ratio exceeded 15%. Thus, the banking sector clean-up is virtually
over. The financial result of the sector (at least for the majority of banks) returned
to a positive territory due to much lower provision costs. Deposit portfolio kept
boosting (+10.9% yoy) on the back of growing real sector’s and households’
incomes, and restore of confidence in banks. UAH lending is also gradually
recovering – both corporate (+8.7% yoy) and private individuals’ (+38.3% yoy).
At the same time, FCY loan portfolio has notably shrunk (-12.4% yoy) owing to
restructuring.
The banking sector remains the leader in reforms. For instance, the IFRS-9
accounting standard entered into force on 1 January 2018. Moreover, the
“merge and capitalization procedure” was simplified, and
it was introduced the new requirements to risks in financial
monitoring. The control over transactions with related
parties was improved. The FX market was also liberalized –
mandatory sales of FCY earnings reduced from 65% to 50%
last year, settlement period for export/import operations
increased from 120 days to 180 days, daily limit for cash
FCY purchase hiked from UAH 12,000 to UAH 150,000
in equivalent and it was allowed repatriation of dividends
accrued in 2016 (in addition to 2014-2015 dividends, but
monthly limit still took place).

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300
450
600
750
900
1050
Nov-15 May-16 Nov-16 May-17 Nov-17
Ukraine 3-Peer**
Ukraine vs Peer group, spread (bp)*
* EMBIG USD
** „3-Peer“ includes Egypt, Iraq, Pakistan
Source: Thomson Reuters, RBI/Raiffeisen RESEARCH
However, banking sector still faces a number of significant problems:
 Firstly, the NPL ratio is extremely high (about 55%) which limits the deve-
lopment of lending. The loan portfolio of state banks by 70% consist of non-
performing loans and this is even higher than insolvent banks’ NPL of 58%.
Foreign banks have around 43% of bad loans.
 Secondly, a fundamental reform of legal system is needed. Due to lack of
rule of law, rights of creditors and borrowers are not protected sufficiently to
expect a significant acceleration of lending activity.
 Finally yet importantly, the share of government in the banking sector exceeds
55% and it keeps growing, which may be harmful for compe on in the future. By
now, the strategy of state banks development is not ready yet, and their future is
unclear. The government stated that they are going to reduce its presence in the
market, but given the size of these banks and the quality of their por olios, this is
extremely challenging task for the next few years. Mean me, the state con nues
to capitalize state owned banks by issuing local bonds.
We do not expect significant changes in the banking sector in 2018. The total
deposit portfolio will continue to grow on the back of increase in wages and
recovery of business activity. Loan activity will also recover gradually, but the
growth will be limited by slow pace of reforms in the legal system and the
continuation of a tight monetary policy. Several small banks may leave the
market or merge, while the share of state will be high. Banks (especially foreign)
will continue to work on their NPL and will slightly reduce it, but this is a task
for many years. In our base case scenario, the banking sector will be profitable
in 2018, and may even show better results than in 2017, as provision costs will
be lower. The National Bank will continue to liberalize the restrictions moving to
their long-run goal of free market, but the pace of easing will slow down notably
given higher political risks and significant liberalization already done last year.
Financial analysts: Sergii Drobot, Raiffeisen Bank Aval JSC, Kiev;
Andreas Schwabe, CFA; RBI Vienna
Market outlook
Country credit rating
Although Ukraine’s rating is likely to remain unchanged in 2018 its outlook
prospects are worsening following the slow and failing reform process. Ukraine’s
poor track record involving numerous delays of the IMF loan disbursement and
failure of structural reforms and anti-corruption measures prompted the EU to let
the program of macro-financial assistance expire without the disbursement of the
third and final tranche of EUR 600 mn for Ukraine. This is clearly speaking of
more challenging financing environment for this year and is most likely to remove
any possibility for the outlook improvement.
Earlier, in Q2-2017, we were assuming that Ukraine’s steady progress in reforms
and the ability to draw on IMF funds could result in positive outlook revision.
Unfortunately the structural problems and weakening political zeal for reforms
also complicates the outlook as Ukraine will enter an election year in 2019 with
political campaign likely to start already in H2 2018. To complicate the matter
Ukraine’s short-term financing ability depends largely on loans from multilaterals
including IMF which provide a kind of approval seal for investors dealing with
Ukraine. Thus far failure of the IMF program can lead to more complications for
Ukraine extending beyond the amount the IMF delayed funds. Ukraine’s gross FX
reserves may be enough to deal with short-term debt repayments but financing
and liquidity indicators remain relatively weak. According to S&P gross financing

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needs of Ukraine will account for 136% of a sum of FX reserves and current
account receipts, while import cover ratio slightly improved reaching 3.6 months
of imports by the end of 2017. Still, without multilateral aid Ukraine will have
limited sources to beef up its international liquidity as the IMF deal implicitly also
works as guarantor for international investors purchasing Ukraine’s Eurobonds.
In this regard slow progress on reforms and difficult macro environment are likely
to halt any further improvement in Ukraine’s ratings. So far Ukraine’s rating - B-/
stable from Fitch and S&P respectively and Caa2/positive from Moody’s - would
be likely to remain unchanged during 2018 while a risk of negative outlook will
be partly mitigated by very low rating score itself.
Sovereign Eurobond valuation
The Eurobond market for Ukraine sprung back to life with a new USD 3 bn
placement in September 2017, which marked an impressive comeback of
the country to international markets. Sadly, Ukraine was unable to follow the
IMF reform plan which led to the delay and cancelation of financial help from
international official lenders. Thus investors’ enthusiasm, which existed during
the placement, started to fade away as soon as UA bond spreads started to
approach the new lows. In particular Ukraine’s spread over the 3-peer group
(similarly rated Egypt, Iraq, Pakistan) tightened to the lowest 40bp suggesting
very little value being left in Ukraine without any rating upgrade. Ukraine’s
rating spread, as measured by EMBIG USD spread differential between Ukraine
and interpolated average for B rated countries, closed in at -1bp suggesting no
more undervaluation on the rating per basis point basis. As our expectations
for positive outlook are unlikely to materialise anytime soon we would consider
Ukraine valuations rich vs. fundamentals, so we rate a “Hold” its Eurobonds.
Moreover, tight Ukraine Eurobond spreads may facilitate a small technical
correction in short-term, i.e. on a 1-month horizon. To illustrate, currently
Ukraine’s benchmark USD due 2027 trades to a 422bp spread which stands
only 3bp wider compared to its historical minimum and a similar situation is
observed for other Ukraine Eurobonds. So far, in our view, Ukraine trades at
very tight spreads while the absence of any prospect for the rating upgrade this
year implies virtually no upside for the bond prices based on current valuations
and peer comparisons.
Financial analyst: Gintaras Shlizhius; RBI Vienna
0
50
100
150
200
250
300
Nov-15Apr-16Sep-16Feb-17 Jul-17 Dec-17
Ukraine rating spread
Ukraine rating spread (bp)*
* Ukraine rating spread - Ukraine EMBIG USD spread
minus average spread for EMBIG included countries ra-
ted a „single B“
Source: Thomson Reuters, RBI/Raiffeisen RESEARCH

Risk notifications and explanations
Risk notifications and explanations
Warnings
 Figures on performance refer to the past. Past performance is not a reliable indicator for future results and the develop-
ment of a financial instrument, a financial index or a securities service. This is particularly true in cases when the finan-
cial instrument, financial index or securities service has been offered for less than 12 months. In particular, this very short
comparison period is not a reliable indicator for future results.
 Performance of a financial instrument, a financial index or a securities service is reduced by commissions, fees and other
charges, which depend on the individual circumstances of the investor.
 The return on an investment in a financial instrument, a financial or securities service can rise or fall due to exchange
rate fluctuations.
 Forecasts of future performance are based purely on estimates and assumptions. Actual future performance may devi-
ate from the forecast. Consequently, forecasts are not a reliable indicator for future results and the development of a fi-
nancial instrument, a financial index or a securities service.
Any information and recommendations designated as such in this publication which are contributed by analysts from RBI’s
subsidiary banks or from Raiffeisen Centrobank (“RCB”) are disseminated unaltered under RBI’s responsibility.
A description of the concepts and methods used in the preparation of financial analyses is available under:
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Disclosure of circumstances and interests which may jeopardise the objectivity of RBI:
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The distribution of all recommendations relating to the 12 months prior to the publications date (column A), as well as
the distribution of recommendations in the context of which services of investment firms set out in Sections A (investment
services and activities) and B (ancillary services) of Annex I of Directive 2014/65/EU of the European Parliament and of
the Council (“special services”) have been provided in the past 12 months (column B).
Investment recommendation Column A
Basis: All recommendations for all financial instruments
(last 12 months)
Column B
Basis: Recommendations for financial instruments of all issuers,
for which special services were rendered in the last 12 months
Buy recommendations 37.9% 43.9%
Hold recommendations 43.3% 49.3%
Sell recommendations 18.8% 6.8%
Detailedinformationonrecommendationsconcerningfinancialinstrumentsorissuersdisseminatedduringaperiodof12month
prior to this publication (acc. to Art. 4 (1) i) Commission Delegated Regulation (EU) 2016/958 of 9.3.2016) is available under:
https://raiffeisenresearch.com/web/rbi-research-portal/recommendation_history

Disclosure
Bonds
Sovereign Eurobonds: Recommendations concerning financial instruments or issuers (disseminated during a period of
12 month prior to this publication), which differ from recommendations made in this publication*
BG HR CZ HU KZ LT PL
Date EUR USD EUR USD EUR USD EUR USD EUR USD EUR USD EUR USD
15/12/2016 H -- H H H -- H H -- B H B H H
24/01/2017 I -- I I I -- I I -- H B I I I
24/02/2017 I -- B I I -- I I -- I I I I I
15/03/2017 I -- I I I -- I I -- I H H I I
27/04/2017 I -- H I I -- I B -- I S I B I
06/06/2017 B -- I B I -- I H -- I H I H I
20/06/2017 I -- I H I -- I I -- I I I B I
07/09/2017 H -- I I I -- I I -- B I I H I
21/09/2017 I -- I I I -- I I -- I I I I I
25/10/2017 I -- I I I -- I I -- H I I I I
30/11/2017 I -- I I I -- I I -- I S S S S
15/12/2017 I -- I I I -- I I -- I I I I I
* recommendations based on absolute expected performance, i.e. expected spread change; B: Buy, H: Hold, S: Sell, I: no change, - no coverage
Sovereign Eurobonds: Recommendations concerning financial instruments or issuers (disseminated during a period of
12 month prior to this publication), which differ from recommendations made in this publication*
RO RU RS TR UA BY MK
Date EUR USD EUR USD EUR USD EUR USD EUR USD EUR USD EUR USD
15/12/2016 H H H S -- B H H -- S -- S H --
24/01/2017 I I I I -- H I I -- I -- H I --
24/02/2017 I I I I -- I I I -- I -- I I --
15/03/2017 B B I H -- I I I -- I -- I B --
27/04/2017 H H I I -- I I I -- I -- B H --
06/06/2017 I I I I -- S I I -- H -- H B --
20/06/2017 I I I I -- I B B -- I -- I I --
07/09/2017 I I I I -- H I I -- B -- I I --
21/09/2017 I I I I -- I I I -- I -- B I --
25/10/2017 I I I I -- I I I -- I -- I I --
30/11/2017 I I I I -- S I I -- I -- H I --
15/12/2017 I I I I -- I H H -- H -- I I --
* recommendations based on absolute expected performance, i.e. expected spread change; B: Buy, H: Hold, S: Sell, I: no change, - no coverage
Local currency government bonds: Recommendations concerning financial instruments or issuers (disseminated during
a period of 12 month prior to this publication), which differ from recommendations made in this publication*
CZ
CZK
HU
HUF
PL
PLN
RO
RON
RU
RUB
TR
TRY
Date 2y 10y 2y 10y 2y 10y 2y 10y 2y 10y 2y 10y
15/12/2016 H H H H B H H B H H H H B H H S S H
24/01/2017 I I I I I I I I I I I I H I I H H I
24/02/2017 I I I I I I I H I I I I S S S I I I
15/03/2017 I B B I H I I I I I I I H H H I S I
27/04/2017 I I I I I I I I S I I I B B I I H S
06/06/2017 I H I I B I I B H I I I I I I B I H
20/06/2017 I I H I H I I I B S S I I I I I I I
24/08/2017 S S S I I S I I H H H H I I I I I I
07/09/2017 I I H B I H I I I I I I I I I I I I
21/09/2017 I I B I I I I I I I I I I I I I I I
12/10/2017 H H H I I I I I I I I I I I I I I B
25/10/2017 I I I H I I I I I I I I I I I H I H
30/11/2017 I I I I I I I I I I I I H H I I I I
15/12/2017 I I B I I I I I B I I I B B I I I I
19/01/2018 I I I I I I I I I I I I H H H I I I
* recommendations based on absolute expected performance in LCY; B: Buy, H: Hold, S: Sell, I: no change, - no coverage

Special
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