Ukraine Economy: In Recovery Mode. February 13, 2017

1. July 2013
February 13, 2017
Ukraine Economy:
In Recovery Mode
Economy
Key macro data and projections
Ukraine Eurobond universe
NDF and CDS
Ukrainian equity multiples
Stock market summary

2. 2
Ukraine Economic Overview | February 2017
Monthly industrial output and retail trade, chg. yoy
Source: UkrStat
Ukraine’s quarterly real GDP, chg. yoy
Sources: UkrStat, SP Advisors
Monthly balance of payments, USD bln
Source: NBU
Ukraine entered 2017 on the front foot – the economy has been broadly
stable over the past year and has adapted to an environment of low
commodity prices. With the Privatbank nationalization complete and the
banking sector clean-up done, the financial sector is poised for a shock-free
year. Economic growth is due to accelerate against a low base, supported by
a recovery of domestic demand. Inflation will remain in the low double-digits,
fueled by the ongoing revision of utility tariffs. External accounts still pose a
challenge for policy formation – robust imports will keep the C/A deficit at
3.5-4.0% of GDP, but sovereign borrowings should cover the gap. We see no
risk of sharp exchange rate volatility through 2017 and we expect only a light
4-5% yoy hryvnia depreciation.
Growth poised to accelerate in 2017 on wages, consumption
4Q16 GDP growth accelerated to 4.5-4.8% yoy (UkrStat’s provisional
estimate), which puts full-year growth above our 1.5% projection. The strong
4Q came on the back of a record annual harvest of nearly 66 mmt in grain
and 13.6 mmt in sunflower seeds. The 4Q aside, economic growth
throughout 2016 was driven by a surge in investment demand and the
emerging recovery of household consumption.
We see growth accelerating materially in 2017 and we expect the growth
will be broad-based. Household consumption on healthy growth in real
incomes (+11.6% yoy in December) will be key contributors. Investment
demand should be supported by the need for both maintenance and
expansion capex, which was temporarily halted during the crisis. Real
exports are poised to turn positive after 5 consecutive years of decline.
However, strengthening domestic demand will inevitably drive imports,
which will keep the contribution of net exports to economic growth
negative. We project 2.8% GDP growth in 2017, and at this early stage we
see an equal likelihood of negative and positive events in the coming
quarters.
Inflation to stay in low double-digits through 2017
Inflation came in at 12.4% yoy in December and accelerated slightly to 12.6%
in January. Still, this marks a material slowdown from 43.3% at end-2015 and
is in-line with the NBU’s 2016 target of 12% +/-3%. The NBU has set a
symmetric corridor of 8% +/-2% by end-2017. Current conditions make that
target a challenge, and we see end-2017 CPI just outside the high end of the
range at 10-11%. The NBU has recognized that upside risks exist, and it set
its inflation forecast at 9.1%. The key risks are related to the ongoing revision
of regulated utility tariffs and the recovery of household consumption.
Demand-side factors that have long been dormant are starting to pull some
weight. The key driver of household consumption will be a doubling of the
minimum wage to UAH 3,200 from the start of the year, which will boost
incomes for the lowest-income households. We do not see a material
weakening of the exchange rate and we expect related pass-through effects
will be limited in 2017.
Given the heightened inflationary risk, the NBU held its key policy rate
unchanged at 14%. We don’t expect a rate cut until April, 6 months after the
last rate action. While a high benchmark rate may hinder a lending recovery,
the central bank’s tough stance is needed to maintain control over price
growth, and we view the NBU’s new inflation-targeting strategy as credible.
Balancing external accounts will remain a challenge
External accounts will remain the main area to watch in 2017. After the C/A
was nearly fully balanced in 2015, the gap widened to c. 3.7% of GDP last
year. A wider deficit in merchandise trade – 7.4% of GDP – was the key
driver. A rapid recovery of imports (both consumer and investment) against
a backdrop of falling real exports will be a drag on economic growth and the
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16
Retail trade Industrial production
-20%
-15%
-10%
-5%
0%
5%
10%
2Q10 3Q11 4Q12 1Q14 2Q15 3Q16 4Q17E
-4.0
-2.0
0.0
2.0
Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16
Financial account (F/A) balance
Current account (C/A) balance
C/A + F/A
Economy: In Recovery Mode
CPI and PPI, yoy
Source: UkrStat
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
CPI PPI Core CPI

3. 3
Ukraine Economic Overview | February 2017
NBU gross international reserves, USD bln
Source: NBU
State budget balance
Sources: MinFin, SP Advisors
Public debt
Sources: MinFin, SP Advisors
balance of payments. To prevent a further widening of the trade deficit, the
NBU may seek to counter any hryvnia appreciation from the current level of
c. UAH 27/USD.
Financial account data show investor confidence in Ukraine is recovering
slowly – debt capital inflows remained near zero, while FDI of USD 3.3 bln
was dominated by debt-to-equity conversions by foreign-owned banks. We
remain conservative on the prospects for debt inflows in 2017; any inflows
will be marginal. Similar to last year’s story, financial account inflows will
come in the form of loans from IFIs or government borrowings.
The NBU replenished its reserves by 16.8% in 2016 to USD 15.5 bln as of
year-end. Reserves decreased 0.6% mom in January as the NBU was forced
to sell currency to alleviate temporary FX market imbalances. The turbulence
has faded over the past two weeks and markets are in a more neutral-to-
positive mood. No fundamental or temporary factors are playing against the
hryvnia. We expect further growth in reserves to USD 18.2 bln in 2017 – the
result of currency purchases by the NBU and inflows of funding from IFIs.
IMF program nearing inflection point, material delays in 2017 almost
certain
Ukraine is well on track to finalize the third review under the IMF program
and receive the fourth loan tranche within weeks. After the Privatbank
nationalization – the most ambitious and challenging reform of recent years
– the rest of the agenda for the current review seems a degree less
significant. On the other hand, we believe the future of the next tranches is
getting less certain. Ukraine achieved and maintained macroeconomic and
financial stability in 2016. Past experience proves that greater confidence
domestically makes the availability of IMF-sponsored programs less critical
and the government becomes more reluctant to implement socially painful
reforms. And appetite for tough action is fading as the approval rating of the
ruling political forces declines. Whatever 2017 may bring, the reform
progress that has been made under the current IMF program has been
substantially more significant and visible than under any of Ukraine’s
previous programs.
Commitment to fiscal consolidation remains firm
Ukraine managed to hold the central budget deficit to 3.0% of GDP in 2016,
proving the government can respect fiscal targets. The 2017 budget does
raise numerous questions, especially on the incomes side where the planned
revenue growth of 18%. It looks as though the government put revenues
higher than what is realistically achievable in order to show it is prepared to
fund certain expenses, such as the growth in the minimum wage.
Nevertheless, if the revenue target is not met, we believe outlays on some
unprotected components will be cut to adjust. The odds of the government
meeting the deficit goal of 3% of GDP in 2017, which implies a primary
surplus of c. 1.0% of GDP, seem very good.
Ukraine’s public debt was heavily affected by the issuance of UAH 107 bln in
t-bills to capitalize Privatbank – the equivalent of 4.6% of 2016E GDP.
Accounting for other borrowings, including IMF loans, Ukraine’s debt-to-GDP
ratio rose 2.7pp yoy to 82.1% last year. Public debt may rise by 12-15% this
year as Ukraine attracts new IMF loan tranches and raises money to fund its
fiscal deficit. Even so, this would result in a decrease in the debt-to-GDP ratio
by 2-3pp against the backdrop of high nominal GDP growth. Overall,
Ukraine’s public sector is entering a phase of declining debt-to-GDP ratios,
which follows the private sector’s massive deleveraging over the past three
years. Ukraine’s debt-to-GDP ratio is likely to slip below 60% by 2020 as the
IMF loan starts to be repaid and nominal GDP continues to expand.
0
5
10
15
20
Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17
Reserves excl. IMF funding IMF funding
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
"08 "09 "10 "11 "12 "13E "14 "15 "16 "17E
UAH bln % of GDP, rhs
0%
20%
40%
60%
80%
100%
0
500
1,000
1,500
2,000
2,500
2009 2011 2013 2015 2017E
UAH bln % of GDP, rhs
Exports of goods & services by regions
Sources: NBU, SP Advisors
31%
15%
22%
30%
0%
20%
40%
60%
80%
100%
1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16
Russia EU Other

4. 4
Ukraine Economic Overview | February 2017
Sources: NBU, UkrStat, Ministry of Finance, Bloomberg, SP Advisors
Appendix A. Key macro data and projections
2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E
Business cycle indicators
Real GDP, chg yoy 2.3% -14.8% 4.1% 5.2% 0.2% 0.2% -6.8% -10.2% 1.5% 2.8%
Household consumption, chg yoy 11.8% -14.9% 7.1% 15.7% 11.7% 7.7% -9.6% -21.0% 3.2% 4.0%
Investments in fixed capital, chg yoy 1.6% -50.5% 3.9% 7.1% 0.9% -6.7% -23.0% -31.0% 14.5% 12.0%
Industrial output, chg yoy -5.2% -21.9% 11.2% 8.0% -0.7% -4.3% -10.1% -13.5% 2.4% 4.5%
Nominal GDP, UAH bln 948 913 1,079 1,300 1,405 1,465 1,567 1,928 2,351 2,755
Nominal GDP, USD bln 180 117 136 163 176 183 132 88 92 98
GDP per capita, USD 3,891 2,550 2,972 3,580 3,865 4,030 2,904 1,944 2,164 2,314
CPI (eop) 22.3% 12.3% 9.1% 4.6% -0.2% 0.5% 24.9% 43.3% 12.4% 10.1%
CPI average 25.2% 15.9% 9.4% 8.0% 0.6% -0.3% 12.1% 43.3% 13.9% 12.1%
Unemployment (ILO methodology, avg) 6.9% 9.6% 8.9% 8.7% 8.2% 7.8% 9.7% 9.4% 8.6% 7.9%
Balance of payments
Current account balance, USD bln -12.8 -1.7 -3.0 -10.2 -14.3 -16.5 -5.3 -1.0 -3.4 -3.8
% GDP -7.1% -1.5% -2.2% -6.3% -8.1% -9.0% -4.0% -1.1% -3.7% -3.9%
Financial account balance, USD bln 9.7 -12.0 8.0 7.8 10.1 18.5 -8.0 0.8 4.5 3.3
% GDP 5.4% -10.2% 5.9% 4.8% 5.8% 10.1% -6.1% 0.9% 4.9% 3.4%
FDI net, USD bln 9.9 4.7 5.8 7.0 6.6 3.4 0.3 2.5 3.4 1.4
% of GDP 5.5% 4.0% 4.2% 4.3% 3.8% 1.8% 0.2% 2.8% 3.6% 1.4%
Gross NBU reserves (eop), USD bln 31.5 26.5 34.6 31.8 24.5 20.4 7.5 13.3 15.5 18.2
Monetary and banking indicators
Monetary base, UAH bln 187 195 226 240 255 307 333 347 382 393
Monetary base, chg. yoy 32% 4% 16% 6% 6% 20% 8% 4% 14% 3%
Money supply (M3), UAH bln 515 487 598 683 773 909 957 1,008 1,102 1,157
Money supply, chg. yoy 30% -5% 23% 14% 13% 18% 5% 4% 11% 5%
Monetary multiplier (eop M3/MB) 2.8 2.5 2.6 2.8 3.0 3.0 2.9 2.9 2.9 2.9
Bank loans, chg. yoy 72% -2% 1% 10% 2% 12% 13% 3% 2% 8%
Bank deposits, chg. yoy 28% -8% 26% 18% 16% 18% 0% 4% 10% 15%
Loan-to-deposit ratio 205% 219% 175% 162% 143% 135% 152% 151% 127% 119%
Exchange rate
Official UAH/USD (eop) 7.70 7.99 7.96 7.99 7.99 7.99 15.77 24.00 27.19 28.50
Official UAH/USD (avg) 5.27 7.79 7.94 7.97 7.99 7.99 11.89 21.84 25.55 28.00
Budget and debt indicators
State budget revenues, UAH bln 231.7 209.7 240.6 314.6 346.0 339.2 357.0 519.0 616.3 724.0
% of GDP 24.4% 23.0% 22.3% 24.2% 24.6% 23.2% 22.8% 26.9% 26.2% 26.3%
State budget expenditures, UAH bln 244.2 245.2 304.9 338.1 399.4 403.9 435.0 552.0 686.4 806.0
% of GDP 25.8% 26.8% 28.3% 26.0% 28.4% 27.6% 27.8% 28.6% 29.2% 29.3%
State budget balance, UAH bln -12.5 -35.5 -64.3 -23.6 -53.4 -64.7 -78.0 -33.0 -70.1 -82.0
% of GDP -1.3% -3.9% -6.0% -1.8% -3.8% -4.4% -5.0% -1.7% -3.0% -3.0%
Public debt, UAH bln 189 318 432 473 516 584 1,101 1,594 1 930 2 175
% GDP 20.0% 34.8% 40.1% 36.4% 36.7% 39.9% 70.3% 82.7% 82.1% 79.0%

5. 5
Ukraine Economic Overview | February 2017
Appendix B. Ukraine Eurobond universe (1)
Ukraine Eurobond yield map*
*as of Feb. 9, 2017
Source: Bloomberg
UkraineFUIB - 12/18 Kernel - 01/22
Avangardco - 10/18
Ukrlandfarming - 03/18
MHP - 04/20
0%
50%
100%
150%
200%
250%
0.0 2.0 4.0 6.0 8.0 10.0
YTM
Privatbank
Ukreximbank Oshchadbank
Years to maturity

6. 6
Ukraine Economic Overview | February 2017
Appendix B. Ukraine Eurobond universe (2)
Key parameters of Ukrainian Eurobonds*
Name Currency
Amount
Maturity
YTM,% Mid. YTM change, pp Raiting
USD mln Mid Spread 1 M YTD Fitch Moody's S&P
Sovereign
Ukraine 12/15 USD 3,000 12/20/2015 - - - - WD Ca D
Ukraine 09/19 USD 1,744 9/1/2019 7.8 0.2 0.9 0.4 B- Caa3 B-
Ukraine 09/20 USD 1,780 9/1/2020 8.2 0.2 0.8 0.2 B- Caa3 B-
Ukraine 09/21 USD 1,409 9/1/2021 8.4 0.2 0.7 0.1 B- Caa3 B-
Ukraine 09/22 USD 1,384 9/1/2022 8.5 0.1 0.7 0.1 B- Caa3 B-
Ukraine 09/23 USD 1,355 9/1/2023 8.6 0.1 0.6 0.0 B- Caa3 B-
Ukraine 09/24 USD 1,339 9/1/2024 8.7 0.1 0.6 0.0 B- Caa3 B-
Ukraine 09/25 USD 1,329 9/1/2025 8.7 0.1 0.5 -0.1 B- Caa3 B-
Ukraine 09/26 USD 1,318 9/1/2026 8.7 0.1 0.4 0.0 B- Caa3 B-
Ukraine 09/27 USD 1,307 9/1/2027 8.6 0.1 0.3 -0.1 B- Caa3 B-
GDP Warrants USD 3,214 5/31/2040 - - - - - - B-
Banks
Privatbank - 01/18 USD 160 1/23/2018 203.4 20.8 -91.9 -89.1 WD WR -
Privatbank - 02/18 USD 175 2/28/2018 178.4 12.2 133.7 133.7 WD Cau -
Privatbank - 02/21 USD 220 2/9/2021 91.4 8.2 -13.9 -16.1 - - -
FUIB - 12/18 USD 158 12/31/2018 10.3 1.5 0.2 0.1 NR WR -
Ukreximbank - 04/22 USD 750 4/27/2022 9.6 0.0 0.0 -0.5 B- Caa3 -
Ukreximbank - 02/23 USD 125 2/9/2023 11.5 0.5 -0.7 -1.0 C Ca -
Ukreximbank - 01/25 USD 600 1/22/2025 10.3 0.0 0.1 -0.5 B- Caa3 -
Oshchadbank - 03/23 USD 700 3/10/2023 9.6 0.2 0.1 -0.3 B- Caa3 -
Oshchadbank - 03/25 USD 500 3/20/2025 10.1 0.2 0.0 -0.5 B- Caa3 -
Corporate
Metinvest - 01/16 USD 90 2/28/2017 - - - - NR Caa3 -
Metinvest - 11/17 USD 305 11/28/2017 - - - - C - -
Metinvest - 02/18 USD 791 2/14/2018 - - - - C Caa3 -
Mriya - 03/16 USD 72 3/30/2016 - - -5.9 - WD - NR
Mriya - 04/18 USD 400 4/19/2018 477.5 130.0 58.1 - WD - NR
Ukrlandfarming - 03/18 USD 543 3/26/2018 163.7 8.9 -10.6 18.6 WD - NR
Avangardco - 10/18 USD 214 10/29/2018 99.2 8.0 -1.8 0.2 WD - -
DTEK - 03/18 USD 0 3/28/2018 - - - - C - -
DTEK - 04/18 USD 0 4/4/2018 - - - - C WR -
Ukrainian Railway - 05/18 USD 0 5/21/2018 - - - - WD - NR
Ferrexpo - 04/19 USD 161 4/7/2019 8.4 0.4 -1.4 -1.4 CCC Caa3 B-
MHP - 04/20 USD 750 4/2/2020 8.2 0.3 -1.0 -1.3 B- - B-
Kernel - 01/22 USD 500 1/31/2022 8.4 0.1 - - B+e - (P)B
*as of Feb. 9, 2017; ** In Default; ***Under Restructuring
Source: Bloomberg

7. 7
Ukraine Economic Overview | February 2017
Appendix C. NDF and CDS
5Y CDS vs. Fitch long-term rating* Hryvnia spot and NDF rates, 6-m development
* data as of Feb. 9, 2016
Source: Bloomberg
Source: Bloomberg
Ukraine
Russia
Hungary
Poland Romania
Turkey
Kazakhstan
0
100
200
300
400
500
600
700
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Fitch long-term rating
5Y CDS
A BBB BB B CCC
20
25
30
35
Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
NDF, 3 months NDF, 6 months
NDF, 12 months UAH/USD

8. 8
Ukraine Economic Overview | February 2017
Ukrainian stock multiples*
MCap, EV/EBITDA EV/Sales P/B
P/E
Net Debt /
Book Value
Sector / Company Ticker USD mln 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E
Agriculture
Kernel KER PW 1,588 4.7 4.3 0.8 0.6 1.3 1.1 6.1 6.6 0.13 0.00
MHP MHPC LI 956 5.3 5.0 1.8 1.6 1.5 1.2 5.2 5.4 1.82 1.46
Astarta AST PW 383 3.3 3.3 1.6 1.3 1.2 1.0 4.1 3.7 0.48 0.36
IMC IMC PW 70 3.0 - 1.3 - - - 3.6 2.0 - -
KSG Agro KSG PW 11 - - - - - - - - - -
Median - 4.0 4.3 1.4 1.3 1.3 1.1 4.6 4.6 0.48 0.36
Food
Avangard AVGR LI 29 - - - - - - - 5.7 - -
Ovostar OVO PW 134 - - - - - - 4.9 4.1 - -
Milkiland MLK PW 20 - - - - - - - - -
UkrProduct UKR LN 2 2.2 1.4 0.2 0.1 0.0 0.0 0.9 0.6 0.39 0.24
Median - 2.2 1.4 0.2 0.1 0.0 0.0 2.9 4.1 0.39 0.24
Oil & Gas
JKX Oil & Gas JKX LN 64 3.8 3.0 1.1 0.9 - - - - - -
Kulczyk Oil SEN PW 32 - - - - - - - - - -
Regal Petroleum RPT LN 18 - - - - - - - - - -
Cadogan Petroleum CAD LN 27 - - - - - - - - - -
Median - 3.8 3.0 1.1 0.9 - - - - - -
Mining
Coal Energy CLE PW 18 - - - - - - - - - -
Metals & Mining
Ferrexpo FXPO LN 1,141 5.2 3.4 1.8 1.4 2.8 1.7 5.8 4.3 1.54 0.55
Real Estate
TMM TR61 GR 1.1 - - - - - - - - - -
Transportation
KDM Shipping KDM PW 9 - - - - - - - - - -
* as of Feb. 9, 2016
Source: Bloomberg
Appendix D. Ukrainian equity multiples

9. 9
Ukraine Economic Overview | February 2017
Ukraine index (WIG Ukraine) vs. global majors
Data as of Feb. 9, 2016
Source: Bloomberg
Ukrainian stock price change, mom*
* as of Feb. 9, 2016
Source: Bloomberg
WIG Ukraine, 6-month development
Source: Bloomberg
Average daily trading in Ukrainian stocks, USD ‘000*
* Only top-10 stocks are shown, data are for Jan. 9, 2017 – Feb. 9, 2017
Source: Bloomberg
0%
1%
2%
2%
2%
3%
3%
7%
7%
12%
13%
13%
23%
0%
0%
0%
1%
2%
2%
3%
4%
4%
8%
10%
13%
16%
-40% -30% -20% -10% 0% 10% 20% 30% 40%
CAC 40
RTS
NIKKEI 225
Dow Jones Ind.
DAX
S&P 500
FTSE 100
NASDAQ 100
HANG SENG
Bovespa
WIG
UX
WIG Ukraine
1M Change YTD
16%
-22%
-8%
1%
3%
3%
9%
10%
11%
12%
16%
17%
21%
23%
26%
29%
55%
221%
-100% 0% 100% 200% 300%
WIG Ukraine
UkrProduct
Kulczyk Oil
Cadogan Petroleum
MHP
JKX Oil & Gas
Ovostar
IMC
Astarta
Coal Energy
Milkiland
KSG Agro
Ferrexpo
Kernel
Agroton
Avangard
Regal Petroleum
KDM Shipping
0
1
2
3
4
5
6
50%
60%
70%
80%
90%
100%
110%
120%
Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
WIG Ukraine Index turnover, USD mln, rhs
WIG Ukraine
WIG
26
34
48
69
126
149
193
253
1,761
7,881
JKX Oil & Gas
IMC
KSG Agro
Milkiland
Kulczyk Oil
MHP
Agroton
Astarta
Kernel
Ferrexpo
Appendix E. Stock market summary

10. 10
Ukraine Economic Overview | February 2017
Contacts
CEO
Nick Piazza
npiazza@spadvisors.eu
Sales and Trading
Oleksandr Tsapin
otsapin@spadvisors.eu
Research
Danylo Spolsky
dspolsky@spadvisors.eu
Commodities Trading and Risk Management
Alexey Yeremin
ayeremin@spavisors.eu
SP Advisors
spadvisors.eu
8 Pankivska St.,
1
st
floor, office 14
Kyiv 01033, Ukraine
+380 44 300 1425
research@spadvisors.eu
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