The NBU announced a shift from the fixed exchange rate regime to managed flexibility of the exchange rate effective today, Oct. 3. Substantiating its decision, the central bank cited steady progress in curbing inflation, a high level of accumulated international reserves, and increased attractiveness of UAH assets. The Bank said it will remain a key player in the F/X market in order to offset the “structural deficit” of foreign currency by selling F/X from its reserves and significantly limit UAH fluctuations. Maintaining exchange rate stability will remain one of the NBU’s key priorities, especially in the short term.

The National Bank’s PMI-type index of business expectations rose by 0.8 points m-o-m in September, to 50.1 on a 0-100 scale, marginally exceeding the neutral level of 50 for the time since June.

Ukraine’s headline current account (C/A) ran a $2.2bn deficit in August, widening sharply from a revised $0.7bn gap in July and bringing the 8M23 deficit to $4.8bn, down from a $6.2bn surplus in 8M22. The financial account (F/A) surplus (including IMF financing) stood at $0.9bn in August, down from $3.2bn in July and bringing the 8M23 surplus to $16.4bn, up from a $11.1bn gap in 8M22.

Ukraine harvested 30.5 Mt of grain as of Sep. 29, up 17% y-o-y, from an area of 7.0 Mha, up 2.3% y-o-y and representing 64% of the total cropland. With the harvest of early crops finished, wheat and barley production came in at 22.2 Mt (+16% y-o-y) and 5.9 Mt (+6.6% y-o-y), respectively. Some 4% of corn plantings were harvested as of Sep. 29 (vs. 1% a year earlier), with the average yield reported at 5.4 t/ha (+40% y-o-y). Among oilseed crops, farmers harvested 5.0 Mt of sunflower from 43% of the planted area, for a yield of 2.3 t/ha (+38% y-o-y). Soybean, gathered from 48% of plantings, yielded 2.6 t/ha (+4.5% y-o-y), with the current crop at 2.2 Mt. The rapeseed harvest, 98% complete, totaled 4.0 Mt (+29% y-o-y) and yielded 2.9 t/ha (+1.7% y-o-y).

There were no notable changes on the front lines last week. Essentially, judging from public information, the Ukrainian military command continues with persistent small-unit infantry attacks along the southern front, without deploying larger formations and mechanized equipment in force in order to minimize its losses. This is seen as the right strategy in a situation where Ukrainian forces lack air superiority and still have no numerical and firepower advantage on the ground while Western military aid remains limited overall. It also explains the lack of sizable territorial gains by Ukrainian forces while they are gradually penetrating heavily fortified Russian defenses. Still, even attacking with relatively limited forces at this stage seems to be enough for the Ukrainian army to hold the initiative on the battlefield, as Ukrainian forces are concurrently maintaining a high tempo of precision strikes against Russian rear areas. At the very least, the outcome of the ongoing Ukrainian campaign of strikes is expected to be that Russia’s ground-based weapons and equipment will be degraded to the extent leaving Russia unable to launch any large-scale offensive operations in the coming months, if not for much longer.

F/X market jitters reappeared in mid-August and the associated turbulence extended into September, with the spread between the official and cash market exchange rates widening to nearly 5%, from 1-2% observed since May.

DTEK Oil & Gas (DOG) reported 1H23 net sales of $359m (-21% h-o-h, -46% y-o-y), EBITDA of $163m (-49% h-o-h, -70% y-o-y), and net income of $65m (-41% h-o-h, -73% y-o-y), for an EBITDA margin of 45% (-25pp h-o-h and y-o-y). Net operating cash flow was negative at $7m (vs. +$34m in 2H22 and -$22m in 1H22), mostly due to a $113m working capital charge. Net investment cash outflow stood at $11m (vs $18m in 2H22 and $11m in 1H22), with CAPEX down 17% h-o-h and up 7% y-o-y to $27m. Net financing cash flow came in at zero, vs. -$1m 2H22 and +$8m in 1H22. Cash balances shrank to $5m from $24m as of end-2023 (-77% h-o-h and -65% y-o-y), with total debt remaining unchanged at $425m and net debt thus increasing by 5% h-o-h and 3% y-o-y to $420m. This yields Debt/EBITDA and Net Debt/EBITDA of 1.3x, down from Debt/EBITDA of 0.7x in 2H22 and 0.4x in 1H22 and Net Debt/EBITDA of 0.6x and 0.4x, respectively.

DTEK Energy extended the deadline for its consent solicitation to amend the terms of its $1.5bn 2027 Eurobond by two days, to Oct. 4, 2023.

According to minutes of the latest NBU Monetary Policy Committee (MPC) meeting, which preceded an NBU Board meeting on Sep. 14, an overwhelming majority of 9 out of 11 MPC members supported a 200bp key rate cut, to 20%, with two members favoring a 300bp cut (see table below). All members agreed that the macroeconomic situation remained largely favorable, with August headline inflation (8.6%) and net F/X sales being lower than NBU projections, while core inflation (10%) was close to the NBU estimate. However, with risks becoming skewed to the downside and the F/X market growing sensitive to news flow, the majority of the committee emphasized the need for caution in loosening monetary policy and keeping the real interest rate high, with the latter being an important condition for further implementation of the NBU’s F/X Liberalization Strategy. Most MPC members see the key rate at 18% by year-end, in line with the current guidance, but several members think there is room for a larger cut, to 16-17%, by end-2023.

Ukraine’s direct and guaranteed public debt stood at $134bn as of end-August, up 0.8% or $1.0bn m-o-m, up 20% or $22bn YTD, and equivalent to an est. 79% of 2023E GDP.

Ukraine has received another EUR 1.5bn budget support tranche from the EU, the eighth disbursement under a EUR 18bn one-year MFA+ program. As with the previous disbursements, the new tranche will be channeled to the state budget to pay wages and pensions, maintain essential public services such as healthcare, education, and housing for relocated people, and restore critical infrastructure destroyed by Russia.

The Ministry of Finance placed UAH 2.5bn ($68m) of hryvnia-denominated bonds at a primary auction yesterday.

Interpipe reported 1H23 net sales of $518m (+12% y-o-y, flat h-o-h), EBITDA of $178m (+3.5x y-o-y, +16% h-o-h), and net income of $122m (-34% h-o-h). On a pass-through basis (without separate attribution to the steelmaking segment), pipe segment EBITDA was up 2.3x y-o-y to $142m, rail EBITDA surged by 5.4x y-o-y to $31m, and steel EBITDA fell by 2.4x y-o-y to $3.8m.

An IMF mission started technical discussions with Ukrainian authorities to prepare the second review of the Fund’s $15.6bn 4-year EFF program and Article IV Consultations. Talks, to be conducted both online and in-person in Warsaw, will focus on Ukraine’s progress meeting the underlying commitments, recent economic developments, as well as fiscal, financial and structural policies. The NBU said the second IMF review was planned for completion by year-end.

LSE-listed MHP, Ukraine’s largest poultry producer, announced on Sep. 25 a tender offer to purchase for cash any and all of its $500m notes maturing on May 10, 2024. The repurchase price was set at 85% of par before Oct. 6, 2023, and 75% before Oct. 26, 2023. The company will finance the buyback with $400m of financing from three international financial institutions (IFI) and its available cash balances. All repurchased notes will be canceled. Concurrently with launching the tender, MHP published its 2Q23 financial results, reporting sales of $809m (+8.6% q-o-q, +36% y-o-y), EBITDA of $109m (-12% q-o-q, -8.0% y-o-y; incl. IFRS 16) and net income of $18m (-64% q-o-q, -10% y-o-y). End-1H23 total debt stood at $1,539m (before IFRS 16), yielding net debt of $1,037m and Net Debt/LTM EBITDA of 2.31x, vs. 3.22x at end-2022. Cash generation soared in 1H23, reflecting both stronger profitability and a $70m release of working capital (vs. a $246m increase in 1H22). As a result, MHP’s end-1H23 cash rose to $502m, up 43% q-o-q and 126% y-o-y (incl. $277m held offshore), well above its minimum threshold of $200m.

DTEK Energy amended the terms of its cash tender offer to repurchase its 2027 Eurobonds via an unmodified Dutch auction launched on Sep. 12. The company set the floor on the maximum acceptance amount at $50m (vs. no lower bound before), increased the consent fee to 1% of the principal (from 0.75%), and allowed investors who tendered their bonds but whose notes were not accepted to revoke their consent. DTEK also adjusted its proposed amendments, capping additional borrowings to finance damage repairs at UAH 5.2bn, adding approval by an independent Supervisory Board member for transactions exceeding $2m according to the new definition of Permitted Businesses. The amendments concerning restricted payments requested allowing the company to pay dividends, with the total restricted payment basket for the period calculated at 50-100% of Consolidated Net Income (depending on the value of Consolidated Leverage Ratio). The Consolidated Net Income calculation was amended to exclude non-cash items such as foreign exchange losses, PP&E impairments, amortization, etc.